FIN 6420 CH 12 EXAM QUESTIONS WITH VERIFIED SOLUTIONS GRADED A+
Mercury Co. has a subsidiary based in Italy and is exposed to translation exposure. Mercury
forecasts that its earnings next year will be €10 million. Mercury decides to hedge the expected
earnings by selling €10 million forward. During the next year, the euro appreciated. Mercury's
consolidated earnings were ____ affected by the euro's movement, and Mercury's hedge
position was ____ affected by the euro's movement.
a. favorably; favorably
b. favorably; adversely
c. adversely; favorably
d. adversely; adversely - Answers favorably; adversely
Which of the following is an example of economic exposure but not an example of transaction
exposure?
a. a decrease in the swiss franc's value decreases the dollar value of interest payments on a
swiss deposit sent to a US firm by a swiss bank
b. an increase in the dollar's value hurts a US firm's domestic sales because foreign competitors
are able to increase their sales to US customers
c. an increase in the pound's value increases a US firm's cost of British pound payables
d. a decrease in the peso's value decreases a US firm's dollar value of peso receivables -
Answers an increase in the dollar's value hurts a US firm's domestic sales because foreign
competitors are able to increase their sales to US customers
Assume that a Japanese car manufacturer exports cars that are priced in yen to US dealerships.
The demand for those cars declines when the yen is strong. The manufacturer also produces
some cars in the United States with US materials, and those cars are priced in dollars. The
manufacturer could reduce its economic exposure by:
a. closing down most of its plants in the United States
b. producing more automobiles in the United States
c. pricing its exports in dollars
, d. relying completely on Japanese suppliers for its parts - Answers producing more automobiles
in the United States
Assume a U.S. firm uses a forward contract to hedge all of its translation exposure. Also
assume that the firm underestimated what its foreign earnings would be. Assume that the
foreign currency depreciated over the year. The firm would generate a translation ____, which
would be ____ than the gain generated by the forward contract.
a. gain; smaller
b. gain; larger
c. loss; larger
d. loss; smaller - Answers loss; larger
Which of the following firms is not exposed to translation exposure?
a. Firm X, with a fully owned subsidiary that periodically remits earnings generated in Great
Britain to the US based parent
b. Firm Y, with a fully owned subsidiary that periodically generates foreign losses in Sweden.
The parent covers at least some of these losses.
c. Firm Z, with a fully owned subsidiary that generates a substantial earnings in Germany. The
subsidiary never remits earnings but reinvests them in Germany.
d. all of these firms are exposed to translation exposure - Answers all of these firms are
exposed to translation exposure
If revenues and costs are equally sensitive to exchange rate movements, MNCs may reduce
their economic exposure by restructuring their operations to shift the sources of costs or
revenues to other locations so that:
a. cash inflows exceed cash outflows in each foreign currency
b. cash outflows exceed cash inflows in each foreign currency
c. cash inflows match cash outflows in each foreign currency
d. none of these are correct - Answers cash inflows match cash outflows in each foreign
currency
Mercury Co. has a subsidiary based in Italy and is exposed to translation exposure. Mercury
forecasts that its earnings next year will be €10 million. Mercury decides to hedge the expected
earnings by selling €10 million forward. During the next year, the euro appreciated. Mercury's
consolidated earnings were ____ affected by the euro's movement, and Mercury's hedge
position was ____ affected by the euro's movement.
a. favorably; favorably
b. favorably; adversely
c. adversely; favorably
d. adversely; adversely - Answers favorably; adversely
Which of the following is an example of economic exposure but not an example of transaction
exposure?
a. a decrease in the swiss franc's value decreases the dollar value of interest payments on a
swiss deposit sent to a US firm by a swiss bank
b. an increase in the dollar's value hurts a US firm's domestic sales because foreign competitors
are able to increase their sales to US customers
c. an increase in the pound's value increases a US firm's cost of British pound payables
d. a decrease in the peso's value decreases a US firm's dollar value of peso receivables -
Answers an increase in the dollar's value hurts a US firm's domestic sales because foreign
competitors are able to increase their sales to US customers
Assume that a Japanese car manufacturer exports cars that are priced in yen to US dealerships.
The demand for those cars declines when the yen is strong. The manufacturer also produces
some cars in the United States with US materials, and those cars are priced in dollars. The
manufacturer could reduce its economic exposure by:
a. closing down most of its plants in the United States
b. producing more automobiles in the United States
c. pricing its exports in dollars
, d. relying completely on Japanese suppliers for its parts - Answers producing more automobiles
in the United States
Assume a U.S. firm uses a forward contract to hedge all of its translation exposure. Also
assume that the firm underestimated what its foreign earnings would be. Assume that the
foreign currency depreciated over the year. The firm would generate a translation ____, which
would be ____ than the gain generated by the forward contract.
a. gain; smaller
b. gain; larger
c. loss; larger
d. loss; smaller - Answers loss; larger
Which of the following firms is not exposed to translation exposure?
a. Firm X, with a fully owned subsidiary that periodically remits earnings generated in Great
Britain to the US based parent
b. Firm Y, with a fully owned subsidiary that periodically generates foreign losses in Sweden.
The parent covers at least some of these losses.
c. Firm Z, with a fully owned subsidiary that generates a substantial earnings in Germany. The
subsidiary never remits earnings but reinvests them in Germany.
d. all of these firms are exposed to translation exposure - Answers all of these firms are
exposed to translation exposure
If revenues and costs are equally sensitive to exchange rate movements, MNCs may reduce
their economic exposure by restructuring their operations to shift the sources of costs or
revenues to other locations so that:
a. cash inflows exceed cash outflows in each foreign currency
b. cash outflows exceed cash inflows in each foreign currency
c. cash inflows match cash outflows in each foreign currency
d. none of these are correct - Answers cash inflows match cash outflows in each foreign
currency
