International Finance Exam 3
questions well answered
________ exposure deals with cash flows that result from existing contractual obligations. -
correct answer ✔✔Transaction
________ exposure measures the change in the present value of the firm resulting from
unexpected changes in exchange rates. - correct answer ✔✔Operating
Each of the following is another name for operating exposure EXCEPT: - correct answer
✔✔Accounting 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. - correct answer ✔✔transaction; 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. - correct answer ✔✔Accounting (aka translation)
Losses from ________ exposure generally reduce taxable income in the year they are realized.
________ exposure losses may reduce taxes over a series of years. - correct answer
✔✔transaction; operating
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. - correct
answer ✔✔transaction; translation
,MNE cash flows may be sensitive to changes in which of the following? - correct answer ✔✔all
of these
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 ________. - correct answer ✔✔decrease; not change
Which of the following is NOT cited as a good reason for hedging currency exposures? - correct
answer ✔✔Currency 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? - correct
answer ✔✔All of these are cited as reasons NOT to hedge.
A ________ hedge refers to an offsetting operating cash flow such as a payable arising from the
conduct of business. - correct answer ✔✔natural
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: - correct answer ✔✔quotation, backlog,
and billing exposure
A U.S. firm sells merchandise today to a British company for £150,000. The current exchange
rate is $1.55/£, 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: - correct answer ✔✔all of these
A U.S. firm sells merchandise today to a British company for £150,000. The current exchange
rate is $1.55/£ , 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/£ the U.S. firm will realize a ________ of ________. -
correct answer ✔✔gain; $4,500
A U.S. firm sells merchandise today to a British company for £150,000. The current exchange
rate is $1.55/£, 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 $1.52/£ the U.S. firm will realize a ________ of ________. -
correct answer ✔✔loss; $4,500
________ is NOT a commonly used contractual hedge against foreign exchange transaction
exposure. - correct answer ✔✔All of these are contractual hedges
Refer to Instruction 10.1. If CVT chooses NOT to hedge their euro payable, the amount they pay
in six months will be: - correct answer ✔✔unknown today
Refer to Instruction 10.1. If CVT chooses to hedge its transaction exposure in the forward
market, it will ________ €3,000,000 forward at a rate of ________. - correct answer ✔✔buy;
$1.22
Refer to Instruction 10.1. CVT chooses to hedge its transaction exposure in the forward market
at the available forward rate. The required amount in dollars to pay off the accounts payable in
6 months will be: - correct answer ✔✔$3,660,000
Refer to Instruction 10.1. If CVT locks in the forward hedge at $1.22/euro, and the spot rate
when the transaction was recorded on the books was $1.25/euro, this will result in a "foreign
exchange accounting transaction ________ of ________. - correct answer ✔✔gain; $90,000
Refer to Instruction 10.1. CVT would be ________ by an amount equal to ________ with a
forward hedge than if they had NOT hedged and their predicted exchange rate for 6 months had
been correct. - correct answer ✔✔better off; $150,000
questions well answered
________ exposure deals with cash flows that result from existing contractual obligations. -
correct answer ✔✔Transaction
________ exposure measures the change in the present value of the firm resulting from
unexpected changes in exchange rates. - correct answer ✔✔Operating
Each of the following is another name for operating exposure EXCEPT: - correct answer
✔✔Accounting 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. - correct answer ✔✔transaction; 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. - correct answer ✔✔Accounting (aka translation)
Losses from ________ exposure generally reduce taxable income in the year they are realized.
________ exposure losses may reduce taxes over a series of years. - correct answer
✔✔transaction; operating
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. - correct
answer ✔✔transaction; translation
,MNE cash flows may be sensitive to changes in which of the following? - correct answer ✔✔all
of these
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 ________. - correct answer ✔✔decrease; not change
Which of the following is NOT cited as a good reason for hedging currency exposures? - correct
answer ✔✔Currency 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? - correct
answer ✔✔All of these are cited as reasons NOT to hedge.
A ________ hedge refers to an offsetting operating cash flow such as a payable arising from the
conduct of business. - correct answer ✔✔natural
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: - correct answer ✔✔quotation, backlog,
and billing exposure
A U.S. firm sells merchandise today to a British company for £150,000. The current exchange
rate is $1.55/£, 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: - correct answer ✔✔all of these
A U.S. firm sells merchandise today to a British company for £150,000. The current exchange
rate is $1.55/£ , 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/£ the U.S. firm will realize a ________ of ________. -
correct answer ✔✔gain; $4,500
A U.S. firm sells merchandise today to a British company for £150,000. The current exchange
rate is $1.55/£, 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 $1.52/£ the U.S. firm will realize a ________ of ________. -
correct answer ✔✔loss; $4,500
________ is NOT a commonly used contractual hedge against foreign exchange transaction
exposure. - correct answer ✔✔All of these are contractual hedges
Refer to Instruction 10.1. If CVT chooses NOT to hedge their euro payable, the amount they pay
in six months will be: - correct answer ✔✔unknown today
Refer to Instruction 10.1. If CVT chooses to hedge its transaction exposure in the forward
market, it will ________ €3,000,000 forward at a rate of ________. - correct answer ✔✔buy;
$1.22
Refer to Instruction 10.1. CVT chooses to hedge its transaction exposure in the forward market
at the available forward rate. The required amount in dollars to pay off the accounts payable in
6 months will be: - correct answer ✔✔$3,660,000
Refer to Instruction 10.1. If CVT locks in the forward hedge at $1.22/euro, and the spot rate
when the transaction was recorded on the books was $1.25/euro, this will result in a "foreign
exchange accounting transaction ________ of ________. - correct answer ✔✔gain; $90,000
Refer to Instruction 10.1. CVT would be ________ by an amount equal to ________ with a
forward hedge than if they had NOT hedged and their predicted exchange rate for 6 months had
been correct. - correct answer ✔✔better off; $150,000
