Question 1

Operating exposure
A)creates foreign exchange accounting gains and losses.
B)causes exchange rates to fluctuate.
C)is the possibility that future cash flows will change due to an unexpected change in foreign exchange rates.
D)measures a country's propensity to import and export.

Accepted Answer

Operating exposure refers to the risk that a company's future cash flows will be affected by unexpected changes in foreign exchange rates. This can occur when a company has significant international operations or relies on imports or exports, and can result in currency-related losses or gains that must be accounted for on the company's financial statements.

Question 2

An unexpected change in exchange rates impacts a firm's cash flows at what level(s)?
A)short run
B)medium run (equilibrium case)
C)long run
D)all of the above

Accepted Answer

An unexpected change in exchange rates can impact a firm's cash flows in all three time periods - short run, medium run (equilibrium case), and long run. In the short run, a change in exchange rates can cause a significant increase or decrease in a firm's cash flows if the firm has not hedged its exposure. In the medium run, the impact of the exchange rate change can be moderated by adjustments in prices, production, and trade flows. In the long run, a firm may be able to shift its operations to minimize the impact of exchange rate fluctuations or may decide to invest in the foreign currency to benefit from a favorable exchange rate.

Question 3

Expected changes in foreign exchange rates should already be factored into anticipated operating results by management and investors.

Accepted Answer

Foreign exchange risk is a well-known risk for companies that engage in international transactions. Management and investors typically factor in anticipated changes in exchange rates and adjust their strategies accordingly to mitigate the impact on operating results.

Question 4

Which of the following is NOT an operating cash flow?
A)intra-firm payable
B)account receivable from an unrelated party
C)interest payment by a subsidiary to a parent company
D)account payable to a foreign subsidiary

Accepted Answer

The answer of Which of the following is NOT an...

Question 5

The goal of operating exposure analysis is to identify strategic operating techniques the firm might adopt to enhance value in the face of unanticipated exchange rate changes.

Accepted Answer

The goal of operating exposure analysis is to identify strategies that will allow the firm to manage the risks of exchange rate changes and to take advantage of opportunities that may arise from such changes. The objective is to enhance value by minimizing the negative effects of exchange rate fluctuations and maximizing the positive effects. This involves identifying sources of operating exposure, evaluating the impact of exchange rate changes on the firm's operations and financial statements, and developing strategies to mitigate or manage the risks associated with such exposure.

Question 6

The three main types of foreign exchange risk are
A)operating, transaction, and translation.
B)translation, accounting, and operating.
C)transaction, accounting, and translation.
D)operating, currency, and market.

Accepted Answer

Option A correctly identifies the three main types of foreign exchange risk as operating, transaction, and translation. Operating risk arises from changes in exchange rates that affect a company's future cash flows and competitiveness in foreign markets. Transaction risk arises from changes in exchange rates while a transaction is pending (e.g. payment from a foreign customer). Translation risk arises from converting a foreign subsidiary's financial statements into the parent company's currency, which can lead to fluctuations in reported earnings. Option B and C both incorrectly include "accounting" as a type of foreign exchange risk. Option D includes "currency risk" which is not typically considered a distinct type of foreign exchange risk.

Question 7

Which of the following is NOT an example of an operating cash flow?
A)management fees and distributed overhead
B)royalties and license fees
C)rent and lease payments
D)dividend paid to parent company

Accepted Answer

A dividend paid to a parent company is a financing cash flow, not an operating cash flow. Operating cash flows are related to the day-to-day operations of a business, such as management fees, royalties, rent payments, and other expenses and revenues directly related to the production and sale of goods and services.

Question 8

Which of the following is NOT an example of a financial cash flow?
A)parent invested equity capital
B)interest on intrafirm lending
C)payment for goods and services
D)intrafirm principal payments

Accepted Answer

Payment for goods and services is a transaction involving the exchange of goods or services for money, but it does not represent a financial cash flow as it is not directly related to the financing activities of a company. The other options all represent financial cash flows, such as equity capital investments, interest on lending, and principal payments.

Question 9

________ cash flows arise from intracompany and intercompany receivables and payments while ________ cash flows are payments for the use of loans and equity.
A)Financing; operating
B)Operating; financing
C)Operating; accounting
D)Accounting; financing

Accepted Answer

Operating cash flows arise from a company's day-to-day operations, including intracompany and intercompany receivables and payments. Financing cash flows, on the other hand, are payments related to the use of loans and equity. Therefore, the correct choice is B.

Question 10

Which of the following is NOT an example of diversifying operations?
A)diversifying sales
B)diversifying location of operations
C)raising funds in more than one country
D)sourcing raw materials in more than one country

Accepted Answer

Raising funds in more than one country is more related to financial strategies rather than diversifying operations, which typically involves spreading out different aspects of the business to reduce risk or increase market reach.

Question 11

What type of international risk exposure measures the change in present value of a firm resulting from changes in future operating cash flows caused by any unexpected change in exchange rates?
A)transaction exposure
B)accounting exposure
C)operating exposure
D)translation exposure

Accepted Answer

Operating exposure measures the change in present value of a firm resulting from changes in future operating cash flows caused by any unexpected change in exchange rates.

Question 12

________ risk measures the change in value of the firm that results from changes in future operating cash flows caused by unexpected changes in exchange rates.
A)Transaction
B)Accounting
C)Operating
D)Translation

Accepted Answer

Operating risk measures the change in value of the firm that results from changes in future operating cash flows caused by unexpected changes in exchange rates. Transaction risk relates to the change in the value of a firm's contractual obligations that result from changes in exchange rates. Accounting risk is the risk that arises from the need to translate foreign currency financial statements into a reporting currency, and translation risk is similar to accounting risk but focuses on the impact of exchange rate changes on the value of foreign assets and liabilities.

Question 13

Under conditions of equilibrium,management would use ________ exchange rate as an unbiased predictor of future spot rates when preparing operating budgets.
A)the current spot
B)the forward rate
C)the black market
D)none of the above

Accepted Answer

Under conditions of equilibrium, management would use the forward rate as an unbiased predictor of future spot rates. This is because the forward rate is determined by the supply and demand for currencies in the present, based on expectations of future spot rates. Therefore, it reflects the market's expectation of the future spot rate at the time the budget is prepared. The current spot rate may not be an accurate predictor of the future spot rate as it can be affected by short term market fluctuations. The black market rate is illegal and thus cannot be used for budgeting purposes.

Question 14

Operating exposure referred to as MEDIUM RUN:EQUILIBRIUM has which of the following set of characteristics?
A)It lasts two to five years, has complete pass-through of exchange rate changes, and existing competitors begin partial responses.
B)It lasts for less than one year, has partial pass-through of exchange rate changes, and existing competitors begin partial responses.
C)It lasts for more than five years, has partial pass-through of exchange rate changes, and existing competitors begin partial responses.
D)It lasts two to five years, has partial pass-through of exchange rate changes, and existing competitors begin partial responses.

Accepted Answer

The answer of Operating exposure referred to as MEDIUM RUN:EQUILIBRIUM...

Question 15

________ exposure is far more important for the long-run health of a business than changes caused by ________ or ________ exposure.
A)Operating; translation; transaction
B)Transaction; operating; translation
C)Accounting; translation; transaction
D)Translation; operating; transaction

Accepted Answer

Operating exposure refers to the impact of changes in exchange rates on a company's future cash flows, while transaction exposure refers to the impact of exchange rate changes on specific transactions. Translation exposure refers to the impact of exchange rate changes on the financial statements of a company. While all three exposures are important, operating exposure is more significant in the long-term as it affects the overall health and profitability of the business.

Question 16

Which of the following is NOT an example of diversification in financing?
A)raising funds in more than one market
B)raising funds in more than one country
C)diversifying sales
D)All of the above qualify.

Accepted Answer

Diversification in financing refers to raising funds from multiple sources or markets, such as options A and B. Diversifying sales is a different concept, and not related to financing or raising funds. Therefore, option C is not an example of diversification in financing.

Question 17

Management must be able to predict disequilibria in international markets to take advantage of diversification strategies.

Accepted Answer

The answer of Management must be able to predict disequilibria...

Question 18

Another name for operating exposure is ________ exposure.
A)economic
B)competitive
C)strategic
D)all of the above

Accepted Answer

The answer of Another name for operating exposure is ________...

Question 19

Simpson Sign Company based in Frostbite Falls,Minnesota has a 6-month C$100,000 contract to complete sign work in Winnipeg,Manitoba,Canada. The current spot rate is $1.02/C$ and the forward rate is $1.01/C$.Under conditions of equilibrium,management would use today ________ when preparing operating budgets.
A)$102,000
B)$101,000
C)$100,000
D)None of the above

Accepted Answer

The answer of Simpson Sign Company based in Frostbite Falls,Minnesota...

Question 20

Operating cash flows may occur in different currencies and at different times,but financing cash flows may occur only in a single currency.

Accepted Answer

Both operating and financing cash flows can occur in different currencies and at different times, as companies often operate and finance their activities in multiple countries and currencies.

Quiz 11: Operating Exposure

Operating exposure

An unexpected change in exchange rates impacts a firm's cash flows at what level(s) ?

Expected changes in foreign exchange rates should already be factored into anticipated operating results by management and investors.

Which of the following is NOT an operating cash flow?

The goal of operating exposure analysis is to identify strategic operating techniques the firm might adopt to enhance value in the face of unanticipated exchange rate changes.

The three main types of foreign exchange risk are

Which of the following is NOT an example of an operating cash flow?

Which of the following is NOT an example of a financial cash flow?

cash flows arise from intracompany and intercompany receivables and payments while cash flows are payments for the use of loans and equity.

Which of the following is NOT an example of diversifying operations?

What type of international risk exposure measures the change in present value of a firm resulting from changes in future operating cash flows caused by any unexpected change in exchange rates?

________ risk measures the change in value of the firm that results from changes in future operating cash flows caused by unexpected changes in exchange rates.

Under conditions of equilibrium,management would use ________ exchange rate as an unbiased predictor of future spot rates when preparing operating budgets.

Operating exposure referred to as MEDIUM RUN:EQUILIBRIUM has which of the following set of characteristics?

exposure is far more important for the long-run health of a business than changes caused by or exposure.

Which of the following is NOT an example of diversification in financing?

Management must be able to predict disequilibria in international markets to take advantage of diversification strategies.

Another name for operating exposure is ________ exposure.

Operating cash flows may occur in different currencies and at different times,but financing cash flows may occur only in a single currency.