Question 1

When the dollar strengthens,the reported consolidated earnings of U.S.based MNCs are _______ affected by translation exposure.When the dollar weakens,the reported consolidated earnings are __________ affected.

Accepted Answer

When the dollar strengthens, the reported consolidated earnings of U.S. based MNCs are unfavorably affected by translation exposure as the foreign currency earnings are translated into fewer U.S. dollars. Conversely, when the dollar weakens, the reported consolidated earnings are favorably affected, but this is only in terms of reported earnings and not cash flows. Therefore, the best choice is C as it correctly identifies the unfavorable impact of a stronger dollar on consolidated earnings.

Question 2

A firm produces goods for which substitute goods are produced in all countries.  Appreciation of the firm's local currency should:

Accepted Answer

E

Question 3

According to the text,currency variability levels _______ perfectly stable over time,and currency correlations _______ perfectly stable over time.

Accepted Answer

The text states that currency variability levels are not perfectly stable over time, indicating that they do vary over time. Similarly, the text mentions that currency correlations are not stable over time and can change depending on various factors such as economic conditions and geopolitical events. Therefore, option C - "Currency variability levels are not stable over time, and currency correlations are not stable over time" - is the best choice.

Question 4

A set of currency cash inflows is more volatile if the correlations are low.

Accepted Answer

Low correlations between the components of a set of currency cash inflows imply that the inflows do not move in tandem, which can actually reduce overall volatility through diversification.

Question 5

A U.S.MNC has the equivalent of $1 million cash outflows in each of two highly negatively correlated currencies.  During _______ dollar cycles,cash outflows are _______.

Accepted Answer

When the dollar is weak, the value of foreign currencies relative to the dollar increases, making the cash outflows in those currencies more expensive in dollar terms. However, because the currencies are highly negatively correlated, when one currency strengthens (making the outflow more expensive), the other weakens (making the outflow less expensive), which tends to stabilize the overall cash outflow in dollar terms.

Question 6

Economic exposure refers to:

Accepted Answer

Economic exposure refers to the impact of exchange rate fluctuations on a firm's future cash flows, which can affect the firm's overall value and competitive position.

Question 7

Assume that the British pound and Swiss franc are highly correlated.  A U.S.firm anticipates the equivalent of $1 million cash outflows in francs and the equivalent of $1 million cash outflows in pounds.  During a _______ cycle,the firm is _______ affected by its exposure.

Accepted Answer

During a strong dollar cycle, the value of foreign currencies like the British pound and Swiss franc decreases relative to the dollar. This means the firm would need fewer dollars to meet its obligations in these currencies, thus being favorably affected by its exposure.

Question 8

Jacko Co.is a U.S.based MNC with net cash inflows of Singapore dollars and net cash inflows of Sunland francs.  These two currencies are highly negatively correlated in their movements against the dollar.  Kriner Co.is a U.S.based MNC that has the same exposure as Jacko Co.in these currencies,except that its Sunland francs represent cash outflows.  Which firm has a high exposure to exchange rate risk

Accepted Answer

Kriner Co. has a high exposure to exchange rate risk because it has cash outflows in Sunland francs, which means that any depreciation of the franc against the dollar will result in higher costs for Kriner Co. On the other hand, Jacko Co. has net cash inflows in both currencies, which means that any fluctuations in the exchange rates will have offsetting effects on the company's cash flows, reducing its exposure to exchange rate risk.

Question 9

Which of the following operations benefits from appreciation of the firm's local currency

Accepted Answer

The answer of Which of the following operations benefits from...

Question 10

Assume that your firm is an importer of Mexican chairs denominated in pesos.  Your competition is mainly U.S.producers of chairs.  You wish to assess the relationship between the percentage change in its stock price (SPt)and the percentage change in the peso's value relative to the dollar (PESOt).  SPt is the dependent variable.  You apply the regression model to an earlier subperiod and a more recent subperiod.  In the recent subperiod,you increased your importing volume.  You should expect that the regression coefficient in the PESOt variable would be _______ in the first subperiod and _______ in the second subperiod.

Accepted Answer

The answer of Assume that your firm is an importer...

Question 11

If a U.S.firm's cost of goods sold exposure is much greater than its sales exposure in Switzerland,there is a _______ overall impact of the Swiss franc's depreciation against the dollar on _______.

Accepted Answer

When a U.S. firm's cost of goods sold (COGS) exposure is much greater than its sales exposure in Switzerland, a depreciation of the Swiss franc against the dollar means that the cost of goods sold in francs becomes cheaper when converted back to dollars, while the impact on sales revenue is less pronounced. This leads to a higher gross profit margin, hence a positive impact on gross profit.

Question 12

Magent Co.is a U.S.company that has exposure to the Swiss francs (SF)and Danish kroner (DK).It has net inflows of SF200 million and net outflows of DK500 million.  The present exchange rate of the SF is about $.40 while the present exchange rate of the DK is $.10.  Magent Co.has not hedged these positions.  The SF and DK are highly correlated in their movements against the dollar.  If the dollar weakens,then Magent Co.will:

Accepted Answer

If the dollar weakens, the value of the SF and DK positions will increase in dollar terms. However, since Magent Co. has a net inflow of SF and a net outflow of DK, the overall effect will be positive for the company because the dollar value of its SF position exceeds the dollar value of its DK position.

Question 13

Diz Co.is a U.S.based MNC with net cash inflows of euros and net cash inflows of Swiss francs.  These two currencies are highly correlated in their movements against the dollar.  Yanta Co.is a U.S.based MNC that has the same level of net cash flows in these currencies as Diz Co.except that its euros represent net cash outflows.  Which firm has a higher exposure to exchange rate risk

Accepted Answer

The answer of Diz Co.is a U.S.based MNC with net...

Question 14

Translation exposure reflects:

Accepted Answer

Translation exposure reflects the exposure of a firm's financial statements to exchange rate fluctuations. This occurs when a company has subsidiaries or operations in foreign countries and has to translate the financial statements of those operations into the reporting currency of the parent company. Fluctuations in exchange rates can affect the value of assets, liabilities, and earnings of the foreign operations, and in turn, can affect the consolidated financial statements of the parent company.

Question 15

Under FASB 52:

Accepted Answer

Under FASB 52, translation gains and losses from translating financial statements of foreign subsidiaries are not included in reported net income, but rather are included in stockholder's equity as a separate component of accumulated other comprehensive income.

Question 16

Which of the following operations benefits from depreciation of the firm's local currency

Accepted Answer

Depreciation of the firm's local currency benefits operations that involve holding assets or receiving revenues in a stronger foreign currency. Investing in foreign bank accounts denominated in foreign currencies prior to the depreciation of the local currency would result in gains when converting back to the now weaker local currency.

Question 17

A firm produces goods for which substitute goods are produced in all countries.  Depreciation of the firm's local currency should:

Accepted Answer

The answer of A firm produces goods for which substitute...

Question 18

Transaction exposure reflects:

Accepted Answer

Transaction exposure refers to the risk that a company's financial obligations or receivables that are denominated in a foreign currency will be affected by fluctuations in exchange rates. It arises from ongoing international transactions such as imports, exports, and foreign investments. Therefore, option A best explains transaction exposure.

Question 19

Generally,MNCs with less foreign costs than foreign revenue will be _______ affected by a _______ foreign currency.

Accepted Answer

When foreign currency strengthens, MNCs with less foreign costs than foreign revenue benefit because their foreign revenue, when converted back to the home currency, increases in value.

Question 20

Economic exposure can affect:

Accepted Answer

The answer of Economic exposure can affect:
...

Quiz 10: Measuring Exposure to Exchange Rate Fluctuations

When the dollar strengthens,the reported consolidated earnings of U.S.based MNCs are _ affected by translation exposure.When the dollar weakens,the reported consolidated earnings are ____ affected.

A firm produces goods for which substitute goods are produced in all countries. Appreciation of the firm's local currency should:

According to the text,currency variability levels _ perfectly stable over time,and currency correlations _ perfectly stable over time.

A set of currency cash inflows is more volatile if the correlations are low.

A U.S.MNC has the equivalent of $1 million cash outflows in each of two highly negatively correlated currencies. During _ dollar cycles,cash outflows are _.

Economic exposure refers to:

Assume that the British pound and Swiss franc are highly correlated. A U.S.firm anticipates the equivalent of $1 million cash outflows in francs and the equivalent of $1 million cash outflows in pounds. During a _ cycle,the firm is _ affected by its exposure.

Which of the following operations benefits from appreciation of the firm's local currency

If a U.S.firm's cost of goods sold exposure is much greater than its sales exposure in Switzerland,there is a _ overall impact of the Swiss franc's depreciation against the dollar on _.

Translation exposure reflects:

Under FASB 52:

Which of the following operations benefits from depreciation of the firm's local currency

A firm produces goods for which substitute goods are produced in all countries. Depreciation of the firm's local currency should:

Transaction exposure reflects:

Generally,MNCs with less foreign costs than foreign revenue will be _ affected by a _ foreign currency.

Economic exposure can affect: