Question 1

For the conservative international firm, there is no reason to move money other than the repatriation of profits.

Accepted Answer

Conservative international firms may move money for various reasons beyond repatriating profits, such as investing in foreign operations, financing international trade, managing currency risk, and optimizing their tax position.

Question 2

Multilateral netting reduces foreign exchange transaction costs.

Accepted Answer

Multilateral netting involves offsetting transactions between multiple parties, thereby reducing the number of foreign exchange transactions required and ultimately lowering costs.

Question 3

Moving funds can reduce tax exposure in high-tax locales and can be used as a way to address limitations placed by foreign governments on the repatriation of profits.

Accepted Answer

Moving funds to a lower-tax locale or utilizing tax-efficient investment strategies can help reduce tax exposure in high-tax locales. It can also be used as a way to work around restrictions on repatriation of profits imposed by certain foreign governments.

Question 4

A fronting loan is used when the firm does not have the collateral or reputation to borrow in a foreign environment.

Accepted Answer

The answer of A fronting loan is used when the...

Question 5

Unanticipated shifts in exchange rates present risk to the international firm.

Accepted Answer

Unanticipated shifts in exchange rates can affect the profits, competitiveness, and cash flow of international firms, making it a significant risk factor in international business operations.

Question 6

Swap contracts exchange foreign currency debt for another liability in the home currency.

Accepted Answer

Swap contracts are financial agreements to exchange certain cash flows or liabilities, not specifically for exchanging foreign currency debt for a home currency liability. They can involve various types of financial instruments, including interest rates, currencies, commodities, etc.

Question 7

In a forward market hedge, the firm sells forward its foreign currency receivables for its home currency, matching the time forward to the foreign currency receivable's due date.

Accepted Answer

This statement accurately describes a forward market hedge, where a firm sells its foreign currency receivables in the forward market to eliminate the risk of exchange rate fluctuations. The transaction involves selling the foreign currency at a predetermined exchange rate and maturity date, effectively locking in the exchange rate for the future receivable.

Question 8

In a money market hedge, the firm matches the balance sheet asset with a liability in the same currency.

Accepted Answer

This statement is true. In a money market hedge, a firm will use a combination of borrowing and investing in the foreign currency to match the value of their asset and liability in the same currency, reducing their currency risk.

Question 9

There are four main types of FX risk: transaction, translation, economic, and arbitrage exposure.

Accepted Answer

There are three main types of FX risk: transaction, translation, and economic exposure. Arbitrage exposure is not commonly classified as a main type of FX risk.

Question 10

In a currency option hedge, the firm covers its downside risk but, because the contract is an option, can also benefit from any upside.

Accepted Answer

This is correct. In a currency option hedge, the firm has the right but not the obligation to exchange currencies at a predetermined exchange rate. This allows them to limit their potential losses but also potentially benefit from any favorable currency fluctuations.

Question 11

The overall goal of cash flow management is to reduce risk and position the firm so that it can benefit from opportunities.

Accepted Answer

Cash flow management is essential for reducing financial risks and maximizing opportunities for a firm. By effectively managing cash inflows and outflows, a company can reduce the likelihood of financial distress and increase its ability to respond to unexpected events. Moreover, optimizing cash flow can enable a business to take advantage of opportunities for growth and expansion, such as investing in new projects, acquiring new assets, or pursuing strategic partnerships with other companies. Therefore, the ultimate goal of cash flow management is to maximize the financial health and performance of a business, both in the short term and the long term.

Question 12

Many corporations do not hedge translation exposure.

Accepted Answer

Many corporations do not hedge translation exposure, as they may believe that the currency fluctuations will even out over time and do not want to incur the costs of hedging. Additionally, some companies may want to maintain a natural hedge by matching their assets and liabilities in the same currency, reducing their overall exposure to currency risk.

Question 13

Operating in more than five local currencies is unusual for the international firm.

Accepted Answer

Operating in more than five local currencies is not unusual for international firms, especially those with a global presence and multiple subsidiaries.

Question 14

In exposure netting, a risk management technique similar to multilateral netting, the firm runs a centralized clearing account that matches and nets out FX exposure across currencies or currency families.

Accepted Answer

Exposure netting is a risk management technique that operates similarly to multilateral netting. The firm maintains a centralized clearing account that nets out foreign exchange exposure across currencies or currency families, hence the statement is true.

Question 15

Finance is best left decentralized in international firms so that local efficiencies and opportunities can be accessed.

Accepted Answer

The answer of Finance is best left decentralized in international...

Question 16

The number of FX markets, along with floating exchange rates, varying country inflation rates, advances in technology for the management of cash, and the growth of the derivatives market are among the conditions that have led to the growth of international finance centers.

Accepted Answer

The statement is true. These conditions have contributed to the growth of international finance centers.

Question 17

The OECD and the U.S. Internal Revenue Service have issued guidelines on transfer pricing because it has such critical tax implications.

Accepted Answer

Transfer pricing affects how profits or losses are attributed to different subsidiaries within a multinational corporation, which can have a significant impact on the taxes paid in each country. The OECD and the IRS have issued guidelines to ensure that transfer pricing is conducted in a fair and transparent manner to prevent tax avoidance or evasion.

Question 18

Transfer pricing is what the company charges for transfers within the company. It is a bookkeeping cost of goods transferred across national borders.

Accepted Answer

Transfer pricing refers to the practice of determining the value of goods or services that are transferred between different units or divisions of a company, often located in different countries. It is not a bookkeeping cost, but a method used by multinational corporations to allocate profits and reduce tax liabilities.

Question 19

Translation exposure occurs when the subsidiary's results are consolidated at the corporate level.

Accepted Answer

Translation exposure refers to the risk that a company's financial statements and consolidated financial statements may be affected by fluctuations in exchange rates. This occurs when a company has subsidiaries operating in foreign countries and their financial results must be converted into the parent company's reporting currency for consolidation purposes. Therefore, translation exposure is directly related to consolidation at the corporate level.

Question 20

Multilateral netting is an approach to debt management in which subsidiaries aggregate their debt service.

Accepted Answer

The answer of Multilateral netting is an approach to debt...

Quiz 18: International Accounting and Financial Management