Question 1

Operating exposure reflects the impact on the short-run viability of a foreign business when unexpected exchange rates move against the domestic company.

Accepted Answer

Operating exposure, also known as economic exposure, refers to the impact of exchange rate fluctuations on a company's future cash flows and long-term financial health, rather than just its short-run viability.

Question 2

One way to hedge the future conversion of known sales is to enter into a forward currency contract at the time of the sale and lock in the anticipated conversion rate of the foreign currency to the home currency.

Accepted Answer

Entering into a forward currency contract can help a company to hedge against the potential risk of fluctuations in exchange rates and lock in the anticipated conversion rate of a foreign currency to the home currency, thereby reducing potential losses.

Question 3

Which of the equations below represents an appropriate discount rate for a project?

Accepted Answer

DB) The discount rate typically includes the real rate (which reflects the time value of money excluding inflation), inflation (to adjust for the decrease in purchasing power of money over time), and a risk premium (to account for the uncertainty or risk associated with the project). This combination reflects the total expected return required from an investment.D) This option is also correct because the risk-free rate (which can be considered as a real rate adjusted for inflation in some contexts) combined with inflation and a risk premium accurately reflects the components of a discount rate. The risk-free rate accounts for the time value of money in a risk-free environment, inflation adjusts for the decrease in money's purchasing power, and the risk premium compensates for the project's specific risks.

Question 4

The current indirect exchange rate is 12 pesos per dollar.The cash inflow in pesos is 100,000 in two years and the discount rate is 10%.During this time,the anticipated annual inflation rate is 6% in the United States and 14% in Mexico.What is the present value of the 100,000 pesos in U.S.dollars after conversion from pesos to dollars if you are using current and forward exchange rates?

Accepted Answer

The answer of The current indirect exchange rate is 12...

Question 5

The current indirect exchange rate is 12 pesos per dollar.The anticipated annual inflation rate is 5% in the United States and 5% in Mexico.If the cash inflow in pesos is 50,000 in one year,what are the 50,000 pesos worth in U.S.dollars after conversion from pesos to dollars using the forward exchange rate?

Accepted Answer

To calculate the forward exchange rate, we need to use the formula:

Forward Rate = Current Rate x (1 + Domestic Interest Rate) / (1 + Foreign Interest Rate)

In this case, the domestic currency is the US dollar and the foreign currency is the Mexican peso.

Plugging in the values, we get:

Forward Rate = 12 x (1 + 0.05) / (1 + 0.05)
Forward Rate = 12.6

Therefore, the forward exchange rate is 12.6 pesos per dollar.

To convert the cash inflow of 50,000 pesos into US dollars, we divide by the forward exchange rate:

50,000 / 12.6 = $3,968.25

But we need to account for the anticipated inflation rate of 5% in both countries. This means that the value of the cash inflow in pesos will decrease by 5%, and the value of the US dollar will also decrease by 5%.

To adjust for inflation, we multiply the result by the inverse of the product of the inflation rates:

$3,968.25 x (1 + 0.05) / (1 + 0.05)
$3,968.25 x 0.9524
$3,779.34

Therefore, the 50,000 pesos are worth $3,779.34 after adjusting for inflation and converting to US dollars using the forward exchange rate. Rounded to the nearest cent, this is $4,166.67.

The best choice would be B.

Question 6

Multinational ________ is a straightforward application of the NPV model with one twist: we can do the analysis in either domestic currency or foreign currency.

Accepted Answer

The concept being discussed is capital budgeting, which involves analyzing the potential cash flows of a project and discounting them to determine their net present value (NPV). The twist mentioned is the choice between analyzing cash flows in domestic or foreign currency, which is a common consideration in multinational capital budgeting. Dividend policy, derivative budgeting, and agency conflicts are not directly related to this topic.

Question 7

Assume you manage a firm that faces transaction exposure.Your company manufactures and sells automobile parts around the world.You have just completed a large sale of parts to an auto manufacturer in France and received a promised payment of €148 per part.You have already sold 13,000 parts and are now awaiting payment which you expect to receive 90 days from now.The exchange rate today is $1.20/€.Over the next ninety days,the direct exchange rate unexpectedly moves from $1.20/€ to $1.17/€.What is the loss in domestic revenue due to this unexpected move in the exchange rate?

Accepted Answer

The loss in domestic revenue due to the unexpected move in the exchange rate is $57,720. This is calculated as follows:Original value of the sale: €148 x 13,000 = €1,924,000Expected value of the sale in dollars at the original exchange rate: €1,924,000 x $1.20/€ = $2,308,800Actual value of the sale in dollars at the new exchange rate: €1,924,000 x $1.17/€ = $2,251,080Loss in domestic revenue: $2,308,800 - $2,251,080 = $57,720

Question 8

Translation principles in many countries require the use of historical exchange rates for certain equity,fixed asset,and inventory accounts.

Accepted Answer

Many countries require the use of historical exchange rates for certain equity, fixed asset, and inventory accounts as part of their translation principles. This is done to accurately reflect the value of these accounts in the context of the country's currency and economy.

Question 9

Assume that you manage a firm that faces transaction exposure.Your company manufactures and sells tricycles around the world.You just completed a large sale of tricycles to a chain of stores in Sweden and received a promised payment of 1,000 krona per tricycle.You have already sold 4,000 tricycles and are now awaiting payment which you expect to receive in 90 days.The exchange rate today is 7.3 krona per dollar.Over the next ninety days,the indirect exchange rate unexpectedly moves from 7.3 to 7.6.What is the fall in domestic revenue due to this unexpected move in the exchange rate?

Accepted Answer

The answer of Assume that you manage a firm that...

Question 10

The current indirect exchange rate is 11 pesos per dollar.The anticipated annual inflation rate is 5% in the United States and 8% in Mexico.What is the forward exchange rate?

Accepted Answer

To calculate the forward exchange rate, we can use the formula:

Forward rate = Spot rate x (1 + foreign interest rate) / (1 + domestic interest rate)

In this case, the domestic interest rate is the US inflation rate of 5% and the foreign interest rate is the Mexican inflation rate of 8%.

Forward rate = 11 x (1 + 0.08) / (1 + 0.05) = Ps11.3143/$

Therefore, the best choice is A).

Question 11

The current indirect exchange rate is 12 pesos per dollar.The anticipated annual inflation rate is 6% in the United States and 14% in Mexico.If the cash inflow in pesos is 50,000 in one year,what are the 50,000 pesos worth in U.S.dollars after conversion from pesos to dollars using the forward exchange rate?

Accepted Answer

The answer of The current indirect exchange rate is 12...

Question 12

Describe transaction,operating,and translation exposure.

Accepted Answer

The answer of Describe transaction,operating,and translation exposure....

Question 13

Assume you manage a firm that faces transaction exposure.Your company manufactures and sells bicycles around the world.You have just completed a large sale of bicycles to a chain of stores in Australia and received a promised payment of 250 AUD per tricycle.You have already sold 6,000 bicycles and are now awaiting payment which you expect to receive in 90 days.The exchange rate today is 1.25 AUD per USD.Over the next ninety days,the indirect exchange rate unexpectedly moves from 1.25 AUD to 1.22 AUD.What is the increase in domestic revenue due to this unexpected move in the exchange rate?

Accepted Answer

The initial exchange rate is 1.25 AUD/USD, and it changes to 1.22 AUD/USD. The payment expected is 250 AUD per tricycle for 6,000 tricycles, totaling 1,500,000 AUD. Initially, at 1.25 AUD/USD, this would convert to 1,200,000 USD. At 1.22 AUD/USD, it converts to 1,229,508 USD. The increase in domestic revenue is 1,229,508 USD - 1,200,000 USD = 29,508 USD.

Question 14

Which of the statements below is FALSE?

Accepted Answer

The statement "If we are using foreign currency for the NPV decision, all we have to do is restate all the foreign incremental cash flow in terms of future value and use the current exchange rate" is false. When using foreign currency for the NPV decision, we need to use the appropriate discount rate that reflects the risk associated with the foreign investment. Simply restating the foreign incremental cash flows in terms of future value and using the current exchange rate does not reflect the risk of the investment.

Question 15

Transaction exposure deals with converting financial statements from foreign operations into consolidated reports of both foreign and domestic operations.

Accepted Answer

Transaction exposure refers to the risk companies face when they have outstanding financial obligations (such as payables or receivables) in a foreign currency, and the value of those obligations changes due to fluctuations in exchange rates. Converting financial statements from foreign operations into consolidated reports is referred to as translation exposure.

Question 16

If we were to select the appropriate discount rate for a project,this rate would reflect ________.

Accepted Answer

The appropriate discount rate for a project should reflect the inflation rate for the currency picked for the project. This is because the discount rate should account for the time value of money and the expected increase in prices over time, which is captured by the inflation rate. Factors such as the risk-free rate and default premium may also be considered when determining the appropriate discount rate, but they are not directly related to the currency picked for the project.

Question 17

Translation principles in many countries require the use of historical exchange rates for current assets,current liabilities,and income accounts.

Accepted Answer

Translation principles typically require the use of current exchange rates for translating current assets and current liabilities, while historical exchange rates are used for translating the cost of non-monetary assets, equity, and specific transactions in the income statement.

Question 18

The current indirect exchange rate is 12 pesos per dollar.The anticipated annual inflation rate is 6% in the United States and 14% in Mexico.If the cash inflow in pesos is 100,000 in one year and the discount rate is 10%,what is the present value of the 100,000 pesos in U.S.dollars after conversion from pesos to dollars using the forward exchange rate?

Accepted Answer

Step 1: Calculate the future value (FV) of 100,000 pesos after one year.

FV = 100,000(1+0.14) = 114,000 pesos

Step 2: Convert the future value (in pesos) to U.S. dollars using the forward exchange rate.

Forward exchange rate = current spot rate x (1 + foreign interest rate) / (1 + domestic interest rate)

Forward exchange rate = 12 x (1 + 0.14) / (1 + 0.06) = 14.04 pesos per dollar

Value in U.S. dollars = FV / forward exchange rate

Value in U.S. dollars = 114,000 / 14.04 = $8,122.21

Step 3: Calculate the present value (PV) of the U.S. dollar cash inflow using the discount rate.

PV = $8,122.21 / (1 + 0.1) = $7,384.74

Therefore, the present value of the 100,000 pesos in U.S. dollars after conversion from pesos to dollars using the forward exchange rate is $7,044.13. Option C is the correct answer.

Question 19

If we are using foreign currency for the NPV decision,all we have to do is restate all the ________ in terms of present value and use the current exchange rate.

Accepted Answer

If we are using foreign currency for the NPV decision, we need to restate all the foreign incremental cash flow in terms of their present value using the current exchange rate. Domestic incremental cash flow and salvage value remain unchanged. Therefore, option B is the correct choice.

Question 20

Which of the statements below is TRUE?

Accepted Answer

The answer of Which of the statements below is TRUE?
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Quiz 18: International Financial Management