Deck 11: Operating Exposure

Question 1

Diversification as a strategic tool to manage operating exposure includes

A) internationalization of suppliers' base.
B) opening new markets with localized production.
C) diversifying finance base across various capital markets and currencies.
D) All of the above

Answer 1

All of the above

Question 2

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

Answer 2

interest payment by a subsidiary to a parent company

Question 3

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

Answer 3

dividend paid to parent company

Question 4

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.

Question 5

________ 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

Question 6

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

Question 7

Net operating exposure

A) is the gross finance exposure minus gross operating exposure.
B) is the difference between the parent company and its subsidiaries exposures.
C) is static in nature regardless of the macro-environment.
D) is the net result of all cash outflows and inflows by currency.

Question 8

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

Question 9

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

Question 10

________ 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

Question 11

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.

Question 12

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

Question 13

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.

Question 14

Another name for operating exposure is ________ exposure.

A) economic
B) competitive
C) strategic
D) all of the above

Question 15

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

Question 16

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.

Question 17

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

Question 18

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

Question 19

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.

Question 20

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

Question 21

A U.S. timber products firm has a long-term contract to import unprocessed logs from Canada. To avoid occasional and unpredictable changes in the exchange rate between the U.S. dollar and the Canadian dollar, the firms agree to split between the two firms the impact of any exchange rate movement. This type of agreement is referred to as

A) risk-sharing.
B) currency-switching.
C) matching.
D) a natural hedge.

Question 22

An MNE has a contract for a relatively predictable long-term inflow of Japanese yen that the firm chooses to hedge by paying for imports from Canada in Japanese yen. This hedging strategy is known as

A) a natural hedge.
B) currency-switching.
C) matching.
D) diversification.

Question 23

Which of the following is NOT an advantage of foreign exchange risk management?

A) the reduction of the variability of cash flows due to domestic business cycles
B) increased availability of capital
C) reduced cost of capital
D) All of the above are potential advantages of foreign exchange risk management.

Question 24

Which of the following is NOT identified by your authors as a proactive management technique to reduce exposure to foreign exchange risk?

A) matching currency cash flows
B) currency swaps
C) remaining a purely domestic firm
D) parallel loans

Question 25

When disequilibria in international markets occur, management can take advantage by

A) doing nothing if they are already diversified and able to realize beneficial portfolio effects.
B) recognizing disequilibria faster than purely domestic competitors.
C) shifting operational of financing activities to take advantage of the disequilibria.
D) all of the above.

Question 26

The particular strategy of trying to offset inflows of cash from one country with outflows of cash in the same currency is known as

A) hedging.
B) diversification.
C) matching.
D) balancing.

Question 27

Which one of the following management techniques is likely to best offset the risk of long-run exposure to receivables denominated in a particular foreign currency?

A) borrow money in the foreign currency in question
B) lend money in the foreign currency in question
C) increase sales to that country
D) increase sales in this country

Question 28

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

Question 29

Diversifying sources of financing, regardless of the currency of denomination, can lower a firm's cost of capital and increase its availability of capital.

Question 30

Risk sharing agreements were especially popular during the Bratton Woods Agreement, but lately have lost its significance in the long-term customer-supplier relationship.

Question 31

The primary method by which a firm may protect itself against operating exposure impacts is

A) money market hedges.
B) diversification.
C) forward contract hedges.
D) balance sheet hedging.

Question 32

An advantage of international diversification is the

A) reduction in the variability of future cash flows due to domestic business cycles.
B) increase in the availability of capital.
C) diversification of political risk.
D) all of the above.

Question 33

Purely domestic firms will be at a disadvantage to MNEs in the event of market disequilibria because

A) domestic firms lack comparative data from its own sources.
B) international firms are already so large.
C) all of the domestic firm's raw materials are imported.
D) None of the above. Domestic firms are not at a disadvantage.

Question 34

A ________ occurs when two business firms in separate countries arrange to borrow each other's currency for a specified period of time.

A) natural hedge loan
B) forward loan
C) currency switch loan
D) back-to-back loan

Question 35

An MNE has a contract for a relatively predictable long-term inflow of Japanese yen that the firm chooses to hedge by seeking out potential suppliers in Japan. This hedging strategy is referred to as

A) a natural hedge.
B) currency-switching.
C) matching.
D) diversification.

Question 36

Cash flow matching can be effective hedging technique when

A) the exposure cash flow is relatively constant and predictable over time.
B) it is part of the risk-sharing agreement.
C) there are no local suppliers that can accept longer term payments in their home currency.
D) all of the above

Question 37

One of the main risks eliminated with Cross-Currency Swaps once compared to back-to-back loans is

A) interest rate risk because the swap dealer locks the interest rates.
B) counterparty risk because the intermediary serves as a guarantor.
C) balance sheet risk since the swap is reported on the balance sheet as liability.
D) all of the above

Question 38

A Canadian firm with a U.S. subsidiary and a U.S. firm with a Canadian subsidiary agree to a parallel loan agreement. In such an agreement, the Canadian firm is making a/an ________ loan to the ________ subsidiary while effectively financing the ________ subsidiary.

A) indirect; U.S.; Canadian
B) indirect; Canadian; U.S.
C) direct; U.S.; Canadian
D) direct; Canadian; U.S.

Question 39

Which of the following is NOT an acceptable hedging technique to reduce risk caused by a relatively predictable long-term foreign currency inflow of Japanese yen?

A) Import raw materials from Japan denominated in yen to substitute for domestic suppliers.
B) Pay suppliers from other countries in yen.
C) Import raw materials from Japan denominated in dollars.
D) Acquire debt denominated in yen.

Question 40

Which one of the following management techniques is likely to best offset the risk of long-run exposure to payables denominated in a particular foreign currency?

A) borrow money in the foreign currency in question
B) lend money in the foreign currency in question
C) rely on the Federal Reserve Board to enact monetary policy favorable to your exposure risk
D) none of the above

Question 41

Most swap dealers arrange swaps so that each firm that is a party to the transaction does not know who the counterparty is.

Question 42

Which of the following is NOT a proactive policy for managing operating exposure?

A) matching currency of cash flow
B) back-to-back loans
C) cross currency swap agreements
D) All of the above are proactive management policies for operating exposure.

Question 43

A ________ resembles a back-to-back loan except that it does not appear on a firm's balance sheet.

A) forward loan
B) currency hedge
C) counterparty
D) currency swap

Question 44

Which of the following is NOT an important impediment to widespread use of parallel loans?

A) difficulty in finding an appropriate counterparty
B) the risk that one of the parties will fail to return the borrowed funds when agreed
C) the process does not avoid exchange rate risk
D) All of the above are significant impediments.

Question 45

Contractual approaches (i.e., options and forwards) have occasionally been used to hedge operating exposure, but are costly and possibly ineffectual.

Question 46

An unexpected change in exchange rates impacts a firm's expected cash flows at four levels; a) the short run, b) medium run: equilibrium, c) medium run: disequilibrium, and d) the long run. Describe the impact on cash flows over each of these categories identifying the time frame for each as well as the price changes, volume changes, and structural changes associated with each stage.

Question 47

Which of the following is NOT one of the commonly employed financial policies used to manage operating and transaction exposure?

A) use of natural hedges by matching currency cash flows
B) back-to-back or parallel loans
C) currency swaps
D) All of the above are commonly used financial policies for managing operating exposure.

Question 48

A ________ is the term used to describe a foreign currency agreement between two parties to exchange a given amount of one currency for another, and after a period of time, to give back the original amounts.

A) matched flow
B) currency swap
C) back-to-back loan
D) none of the above

Question 49

After being introduced in the 1980s, currency swaps have gained increasing importance as financial derivative instruments.

Question 50

Swap agreements are treated as off-balance sheet transactions via U.S. accounting methods.

Question 51

A British firm has a subsidiary in the U.S., and a U.S. firm, known to the British firm, has a subsidiary in Britain. Define and then provide an example for each of the following management techniques for reducing the firm's operating cash flows. The following are techniques to consider:
(a) matching currency cash flows
(b) risk-sharing agreements
(c) back-to-back or parallel loans

Question 52

Swap agreements are treated as line items on the balance sheet via U.S. accounting methods.

Question 53

Most swap dealers arrange swaps so that each firm that is a party to the transaction knows who the counterparty is.

Question 54

Diversification is possibly the best technique for reducing the problems associated with international transactions. Provide one example each of international financial diversification and international operational diversification and explain how the action reduces risk.

Question 55

An expected change in foreign exchange rates is not included in the definition of operating exposure, because both management and investors should have factored this information into their evaluation of anticipated operating results and market value. Describe how the expected change in foreign exchange rates would be reflected in the decision-making process from the perspective of a) management, b) debt service, c) the investor, and d) the broader macroeconomic perspective.

Question 56

After being introduced in the 1980s, currency swaps have remained a relatively insignificant financial derivative instrument.

Question 57

Currency swaps are exclusively for periods of time under one year.

Question 58

A British firm and a U.S. Corporation each wish to enter into a currency swap hedging agreement. The British firm is receiving U.S. dollars from sales in the U.S. but wants pounds. The U.S. firm is receiving pounds from sales in Britain but wants dollars. Which of the following choices would best satisfy the desires of the firms?

A) The British firm pays dollars to a swap dealer and receives pounds from the dealer. The U.S. firm pays pounds to the swap dealer and receives dollars.
B) The U.S. firm pays dollars to a swap dealer and receives pounds from the dealer. The British firm pays pounds to the swap dealer and receives dollars.
C) The British firm pays pounds to a swap dealer and receives pounds from the dealer. The U.S. firm pays dollars to the swap dealer and receives dollars.
D) The British firm pays dollars to a swap dealer and receives dollars from the dealer. The U.S. firm pays pounds to the swap dealer and receives pounds.