Multinational Financial Management
Exam 3 MC Questions with Verified
Answers
The potential exposure that any individual firm bears that the second party to any
financial contract will be unable to fulfill its obligations under the contract is called: -
ANSWERScounterparty risk
Counterparty risk is greater for exchange - traded derivatives than for over-the-counter -
ANSWERSFalse
Swap rates are derived from the yield curves in each major currency - ANSWERSTrue
___________ exposure deals with cash flows that result from existing contractual
obligations. - ANSWERSTransaction
___________ exposure measures the change in the present value of the firm resulting
from unexpected changes in exchange rates - ANSWERSOperating
Each of the following is another name for operating exposure EXCEPT: -
ANSWERSaccounting exposure
Transaction exposure and operating exposure exist because of unexpected changes in
future cash flows. The difference between the two is that ___________ exposure deals
with cash flows already contracted for, while ___________ exposure deals with future
cash flows that might change because of changes in exchange rates. -
ANSWERStransaction; operating
_____________ exposure is the potential for accounting-derived changes in owner's
equity to occur because of the need to translate foreign currency financial statements
into a single reporting currency. - ANSWERSAccounting (aka translation)
Losses from __________ exposure generally reduce taxable income in the year they
are realized. _____________ exposure losses are not cash losses and therefore, are
not tax deductible. - ANSWERStransaction; Translation
MNE cash flows may be sensitive to changes in which of following? - ANSWERSAll:
interest rates, commodity prices, exchange rates
Assuming no transaction costs (i.e., hedging is "free"), hedging currency exposures
should __________ the variability of expected cash flows to a firm and at the same
, time, the expected value of the cash flows should _____________. -
ANSWERSdecrease; not change
Which of the following is NOT cited as a good reason for hedging currency exposures? -
ANSWERSCurrency risk management increases the expected cash flows to the firm.
Which of the following is cited as a good reason for NOT hedging currency exposures? -
ANSWERSAll of the above: Hedging activities are often of greater benefit to
management than to shareholders; Shareholders are more capable of diversifying risk
than management; Currency risk management through hedging does not increase
expected cash flows.
The stages in the life of a transaction exposure can be broken into three distinct time
periods. The first time period is the time between quoting a price and reaching an actual
sale agreement or contract. The next time period is the time lag between taking an
order and actually filling or delivering it. Finally, the time it takes to get paid after
delivering the product. In order, these stages of transaction exposure may be identified
as: - ANSWERSquotation, backlog, and billing exposure
A U.S. firm sells merchandise today to a British company for 150,000 pounds. The
current exchange rate is $1.55/pound, the account is payable in three months, and the
firm chooses to avoid any hedging techniques designed to reduce or eliminate the risk
of changes in the exchange rate. The U.S. firm is at risk today of a loss if: -
ANSWERSall of the above: the exchange rate doesn't change; the exchange rate
changes to $1.58/pound; the exchange rate changes to $1.52/pound.
A U.S. firm sells merchandise today to a British company for 150,000 pounds. The
current exchange rate is $1.55/pound, the account is payable in three months, and the
firm chooses to avoid any hedging techniques designed to reduce or eliminate the risk
of changes in the exchange rate. If the exchange rate changes to $1.58/pound the U.S.
firm will realize a ___________ of ____________. - ANSWERSgain; $4,500
A U.S. firm sells merchandise today to a British company for 150,000 pounds. The
current exchange rate is $1.55/pound, the account is payable in three months, and the
firm chooses to avoid any hedging tecnhiques designed to reduce or eliminate the risk
of changes int eh exchange rate. If the exchange rate changes to $1.52/pound the U.S.
firm will realize a ___________ of ___________. - ANSWERSloss; $4,500
____________ is NOT a commonly used contractual hedge against foreign exchange
transaction exposure. - ANSWERSAll of the above: forward market hedge, money
market hedge, options market hedge
A _________ hedge refers to an offsetting operating cash flow such as a payable
arising from the conduct of business - ANSWERSnatural
Exam 3 MC Questions with Verified
Answers
The potential exposure that any individual firm bears that the second party to any
financial contract will be unable to fulfill its obligations under the contract is called: -
ANSWERScounterparty risk
Counterparty risk is greater for exchange - traded derivatives than for over-the-counter -
ANSWERSFalse
Swap rates are derived from the yield curves in each major currency - ANSWERSTrue
___________ exposure deals with cash flows that result from existing contractual
obligations. - ANSWERSTransaction
___________ exposure measures the change in the present value of the firm resulting
from unexpected changes in exchange rates - ANSWERSOperating
Each of the following is another name for operating exposure EXCEPT: -
ANSWERSaccounting exposure
Transaction exposure and operating exposure exist because of unexpected changes in
future cash flows. The difference between the two is that ___________ exposure deals
with cash flows already contracted for, while ___________ exposure deals with future
cash flows that might change because of changes in exchange rates. -
ANSWERStransaction; operating
_____________ exposure is the potential for accounting-derived changes in owner's
equity to occur because of the need to translate foreign currency financial statements
into a single reporting currency. - ANSWERSAccounting (aka translation)
Losses from __________ exposure generally reduce taxable income in the year they
are realized. _____________ exposure losses are not cash losses and therefore, are
not tax deductible. - ANSWERStransaction; Translation
MNE cash flows may be sensitive to changes in which of following? - ANSWERSAll:
interest rates, commodity prices, exchange rates
Assuming no transaction costs (i.e., hedging is "free"), hedging currency exposures
should __________ the variability of expected cash flows to a firm and at the same
, time, the expected value of the cash flows should _____________. -
ANSWERSdecrease; not change
Which of the following is NOT cited as a good reason for hedging currency exposures? -
ANSWERSCurrency risk management increases the expected cash flows to the firm.
Which of the following is cited as a good reason for NOT hedging currency exposures? -
ANSWERSAll of the above: Hedging activities are often of greater benefit to
management than to shareholders; Shareholders are more capable of diversifying risk
than management; Currency risk management through hedging does not increase
expected cash flows.
The stages in the life of a transaction exposure can be broken into three distinct time
periods. The first time period is the time between quoting a price and reaching an actual
sale agreement or contract. The next time period is the time lag between taking an
order and actually filling or delivering it. Finally, the time it takes to get paid after
delivering the product. In order, these stages of transaction exposure may be identified
as: - ANSWERSquotation, backlog, and billing exposure
A U.S. firm sells merchandise today to a British company for 150,000 pounds. The
current exchange rate is $1.55/pound, the account is payable in three months, and the
firm chooses to avoid any hedging techniques designed to reduce or eliminate the risk
of changes in the exchange rate. The U.S. firm is at risk today of a loss if: -
ANSWERSall of the above: the exchange rate doesn't change; the exchange rate
changes to $1.58/pound; the exchange rate changes to $1.52/pound.
A U.S. firm sells merchandise today to a British company for 150,000 pounds. The
current exchange rate is $1.55/pound, the account is payable in three months, and the
firm chooses to avoid any hedging techniques designed to reduce or eliminate the risk
of changes in the exchange rate. If the exchange rate changes to $1.58/pound the U.S.
firm will realize a ___________ of ____________. - ANSWERSgain; $4,500
A U.S. firm sells merchandise today to a British company for 150,000 pounds. The
current exchange rate is $1.55/pound, the account is payable in three months, and the
firm chooses to avoid any hedging tecnhiques designed to reduce or eliminate the risk
of changes int eh exchange rate. If the exchange rate changes to $1.52/pound the U.S.
firm will realize a ___________ of ___________. - ANSWERSloss; $4,500
____________ is NOT a commonly used contractual hedge against foreign exchange
transaction exposure. - ANSWERSAll of the above: forward market hedge, money
market hedge, options market hedge
A _________ hedge refers to an offsetting operating cash flow such as a payable
arising from the conduct of business - ANSWERSnatural
