Deck 13: Managing Foreign Exchange Risk

Question 1

Which of the following is an element of currency swap?

A) Re- exchange of principal at maturity.
B) Interest exchanges over its term.
C) Initial principal exchange.
D) All of the above.

Answer 1

D

Question 2

Australia adopted a floating exchange rate regime in:

A) 1992.
B) 1976.
C) 2000.
D) 1983.

Answer 2

D

Question 3

An asset (liability) can be hedged by matching it with a liability (asset) which changes in value by the direction whenever the basic position changes in value.

A) different amount but in the same
B) same amount but in the opposite
C) different amount but in the opposite
D) same amount and in the same

Answer 3

B

Question 4

A business has a when its value depends on the exchange rate.

A) foreign exchange exposure
B) depreciation
C) appreciation
D) crisis

Question 5

There are a number of instruments designed for foreign currency hedging, all of which are OTC instruments. The ones most frequently used are:

A) put options.
B) call options.
C) fixed- rate instruments (currency swaps and forward foreign exchange contracts).
D) options.

Question 6

Which of the following is an active risk- management technique?

A) A 'covering everything' approach.
B) A 'selective hedging' approach.
C) A 'do nothing' approach.
D) None of the above.

Question 7

When there is a close, but not perfect, correlation between the values of the offsetting assets and liabilities, the process of hedging is known as :

A) close hedging.
B) cross- hedging.
C) autocorrelation.
D) serial hedging.

Question 8

In a foreign currency loan, a of the Australian Dollar (AUD) will the AUD value of the outstanding principal.

A) depreciation; increase
B) depreciation; decrease
C) depreciation; will not change
D) none of the above

Question 9

When the use of financial instruments increases the uncertainty of cash flows, they are being used for:

A) hedging.
B) monitoring purposes.
C) speculation.
D) none of the above.

Question 10

Foreign exchange exposures can be managed by:

A) passive risk- management techniques.
B) selective hedging.
C) active risk- management techniques.
D) all of the above.

Question 11

Which of the following benchmarks is used to measure treasury performance?

A) Budgeted exchange rate.
B) Forward rate for settlement on the day that the export receipts come in.
C) Spot rate ruling at the time the export receipts come in.
D) All of the above.

Question 12

Which of the following is a foreign exchange hedging vehicle?

A) Currency options (with no AUD leg).
B) Non- AUD swap foreign exchange.
C) Currency options (with AUD leg).
D) All of the above.

Question 13

A _ occurs when cash flows within the current accounting period are affected by movements in the exchange rate.

A) transaction exposure
B) foreign exchange exposure
C) translation exposure
D) credit exposure

Question 14

Attitude towards risk depends on:

A) countries the company deals with.
B) foreign exchange exposure.
C) psychological factors.
D) none of the above.

Question 15

The exchange rate may also have an indirect effect on a business through its impact on competitors or suppliers. This form of exposure is known as:

A) supplier exposure.
B) economic exposure.
C) competitor exposure.
D) none of the above.

Question 16

Which of the following is an example of transaction exposure?

A) Income from overseas subsidiaries.
B) Export income denominated in foreign currencies.
C) An importer's payments for goods and services.
D) All of the above.

Question 17

If financial instruments are used to reduce the uncertainty of future cash flows, they are being used to:

A) hedge.
B) increase return.
C) increase risk.
D) speculate.

Question 18

is a situation in which a business undertakes offsetting transactions in a foreign currency so that there is no net foreign exchange exposure.

A) A partial hedge
B) A natural hedge
C) A super hedge
D) A currency swap

Question 19

Which of the following is an example of translation exposure?

A) A foreign currency loan.
B) The value of overseas investments (such as bonds or shares) will fall as the AUD appreciates.
C) A and B.
D) None of the above.

Question 20

One way of reducing the cost of hedging with options is to:

A) use a collar.
B) use a range forward.
C) go on the Chicago Board of Trade.
D) A and B.

Question 21

There are a number of instruments designed for foreign currency hedging, all of which are:

A) forwards.
B) options.
C) futures.
D) OTC instruments.

Question 22

has forced businesses to develop techniques for dealing with the impact of exchange rate changes on their value.

A) The USA
B) China
C) The Australian Government
D) Volatility

Question 23

As long as there is a positive relationship between gold prices and the USD, a portfolio combining both gold and US dollars would have a value which is more stable than the prices of either of the constituent assets.

Question 24

Which of the following is a foreign exchange hedging instrument?

A) Non- AUD forward foreign exchange.
B) AUD swap foreign exchange.
C) AUD forward foreign exchange.
D) All of the above.

Question 25

One of the problems using options to hedge forex exposure is:

A) the cost.
B) it is risky.
C) unavailable.
D) it does not work.

Question 26

A _ gives the right to buy Australian dollars in exchange for US dollars at a specified exchange rate.

A) call option
B) put option
C) collar
D) forward AUD

Question 27

A variation of the 'covering everything' approach is to cover a fixed proportion of exposures (e.g. 50%) at all times.

Question 28

The corporate treasurer is judged against the spot rate ruling at the time the export receipts come in.

Question 29

A call on the AUD against the USD is the same as a on the USD against the AUD.

A) put option
B) call option
C) forward AUD
D) collar

Question 30

In the construction of a range forward:

A) one will have to use put options only.
B) one will have to use call options only.
C) the exercise price does not matter.
D) it is possible to come up with a zero- cost hedging tool.

Question 31

Micro exposure refers to the sensitivity of the value of the business (measured, perhaps, by the share
price) to the exchange rate.

Question 32

Hedging usually takes the form of closing an exposure directly.

Question 33

A firm's choice between active and passive management of exposures will depend on its:

A) corporate treasurer's level of education.
B) risk manager.
C) CEO.
D) attitude to risk.

Question 34

'Covering everything' ignores all exposures.

Question 35

The active management approach is attractive to those who believe that corporate risk management does not add value to a business.

Question 36

Existence of foreign exchange exposures creates uncertainty about future cash flows.

Question 37

Which of the following is a passive risk- management technique?

A) A 'covering everything' approach.
B) A 'do nothing' approach.
C) A 'selective hedging' approach.
D) A and B.

Question 38

A(n) _ is a hedge in which there is less- than- perfect correlation between the values of the assets and liabilities concerned (also known as cross- hedging).

A) partial hedge
B) exchange rate
C) natural hedge
D) currency swap

Question 39

Which of the following instruments has the highest turnover?

A) AUD swap foreign exchange.
B) Currency options (with AUD leg).
C) Currency options (with no AUD leg).
D) AUD forward foreign exchange.

Question 40

A occurs when the company has assets or liabilities denominated in foreign currencies.

A) translation exposure
B) foreign exchange exposure
C) credit exposure
D) transaction exposure

Question 41

The 'do nothing' approach hedges against all exposures.

Question 42

One problem with options is the high premium cost usually involved.

Question 43

At the maturity of the debt and swap, the principal amounts will be re- exchanged at the rate established at the commencement of the swap.

Question 44

Trading volumes for all hedging instruments declined sharply because of the Global Financial Crisis (GFC).

Question 45

Businesses cannot use financial instruments to modify the uncertainty of future cash flows.

Question 46

Corporations do not depend on natural hedges.

Question 47

When exposures are covered using fixed- rate instruments, the business confronts the problem of regret; if the exchange rate moves in favour of the business, it gets no advantage from this movement.

Question 48

It is not necessary to have a benchmark in order to measure treasury performance.

Question 49

Options cannot be used to hedge foreign exchange exposures.

Question 50

Options are analogous to life or fire insurance and, in those cases, it is clearly desirable that the premium be 'wasted'.

Question 51

Over the life of the swap, the three counterparties exchange interest.

Question 52

A failure to use financial instruments to cover existing exposures (i.e. active management) is a form of speculation.

Question 53

The value of overseas investments (such as bonds or shares) will fall as the AUD appreciates.

Question 54

Accounting conventions require that the changes in the market value of the offshore assets and liabilities, including changes caused by movements in the exchange rate, be brought to book.

Question 55

The exchange rate may also have an indirect effect on a business through its impact on competitors or suppliers.

Question 56

A call on the AUD will be a useful hedging instrument for anyone receiving foreign currency and desiring to purchase Australian dollars. Importers and offshore borrowers are typical users.

Question 57

Some companies attempt to insulate themselves from exchange rate movements by using a passive approach and to concentrate on their core business.

Question 58

Cooper and Franks (1987) argue that measures of performance should be based on economic (or opportunity) costs which will not always be reflected in accounting results.

Question 59

In practice, future revenues are not fully predictable, so that a 'rule of thumb' is needed in order to implement this approach; for example, the (say) exporter might borrow enough to hedge three years' revenue. He will also be subject to restrictions arising out of balance sheet ratios (e.g. the debt- equity ratio).

Question 60

A call option gives the right to buy Australian dollars in exchange for US dollars at a specified exchange rate.

Question 61

How does a firm decide whether to adopt an active or passive strategy?

Question 62

There is a small percentage of corporates that engage in active management.

Question 63

The corporate treasurer is judged against the budgeted exchange rate, which is the current spot rate.

Question 64

Explain a currency swap.

Question 65

The corporate treasurer cannot be judged against the forward rate for settlement on the day that the export receipts come in.

Question 66

The traditional classification of foreign exchange exposures is largely based on the accounting impact of changes in the exchange rate.

Question 67

Australian businesses have a low degree of involvement in international trade and international financial transactions.

Question 68

Using natural hedges is equivalent to using forward contracts - they do not provide any kind of windfall.

Question 69

When the use of financial instruments decreases the uncertainty of cash flows, they are being used for speculation.

Question 70

Currency swaps are the most frequently used foreign exchange hedging vehicle in Australia.