Deck 12: International Bond Market

Question 1

The exposure coefficient,b,is defined as

A)Cov (P, S) / Cov (S)
B)Cov (P, S) / Var (S)
C)Var (S) / Cov (P,S)
D)Cov (P, S) / Var (P)

Answer 1

B

Question 2

The variability of the dollar value of an asset (invested overseas)depends on:

A)the variability of the dollar value of the asset that is related to random changes in the exchange rate
B)the dollar value variability that is independent of exchange rate movements
C)a and b
D)none of these

Answer 2

C

Question 3

The expected value of the investment in U.S.dollars is:

A)$2,083.33
B)$2,187.50
C)$6,250.00
D)$6,562.50

Answer 3

B

Question 4

The extend to which the value of the firm is affected by unanticipated changes in exchange rates is called

A)economic exposure
B)operating exposure
C)transaction exposure
D)translation exposure

Question 5

The "exposure" (i.e.the regression coefficient beta)is:

A)67.97
B)679.78
C)6797.80
D)none of these

Question 6

Which of the following conclusions are correct?

A)most of the volatility of the dollar value of the Israeli asset can be removed by hedging exchange risk because b²[Var(S)] and Var(e) are 236,717 ($)² and 493,751 ($)² respectively
B)most of the volatility of the dollar value of the Israeli asset can not be removed by hedging exchange risk because b²[Var(S)] and Var(e) are 236,717 ($)² and 493,751 ($)² respectively
C)most of the volatility of the dollar value of the Israeli asset can not be removed by hedging exchange risk because b²[Var(S)] and Var(e) are 493,751 ($)² and 236,717 ($)², respectively
D)most of the volatility of the dollar value of the Israeli asset can be removed by hedging exchange risk because b²[Var(S)] and Var(e) are 493,751 ($)² and 236,717 ($)² respectively

Question 7

The dollar operating cash flows following a depreciation of a foreign currency may change for the following reasons:

A)the conversion effect
B)the competitive effect
C)a and b
D)none of these

Question 8

A firm's operating exposure is:

A)defined as the extent to which the firm's operating cash flows would be affected by the random changes in exchange rates
B)determined by the structure of the markets in which the firm sources its inputs, such as labor and materials, and sells its products
C)determined by the firm's ability to mitigate the effect of exchange rate changes by adjusting its markets, product mix, and sourcing
D)all of these

Question 9

After the appreciation of the Canadian dollar,firm ABC loses market share in the United States because American firms can sell their products at a lower price.This is an example of

A)Competitive effect
B)Conversion effect
C)Exchange rate effect
D)Unfair competition

Question 10

Which of the following statements is true?

A)Exchange rate exposure on a foreign asset can be eliminated completely via hedging in all cases.
B)Exchange rate exposure on a foreign asset can be eliminated completely via hedging if the value of the foreign asset is fixed.
C)Exchange rate exposure on a foreign asset can be eliminated completely via hedging if the value of the foreign asset is variable.
D)Exchange rate exposure on a foreign asset can never be eliminated completely.

Question 11

The variance of the exchange rate is:

A)0.001968
B)0.002968
C)0.003968
D)0.004968

Question 12

Economic exposure refers to:

A)the sensitivity of realized domestic currency values of the firm's contractual cash flows denominated in foreign currencies to unexpected exchange rate changes
B)the extent to which the value of the firm would be affected by unanticipated changes in exchange rate
C)the potential that the firm's consolidated financial statement can be affected by changes in exchange rates
D)ex post and ex ante currency exposures

Question 13

It is conventional to classify foreign currency exposures into the following types:

A)economic exposure, transaction exposure, and translation exposure
B)economic exposure, noneconomic exposure, and political exposure
C)national exposure, international exposure, and trade exposure
D)conversion exposure, and exchange exposure

Question 14

Operating exposure can be defined as:

A)the future home currency values of the firm's assets and liabilities
B)the extent to which the firm's operating cash flows would be affected by random changes in exchange rates
C)the sensitivity of realized domestic currency values of the firm's contractual cash flows denominated in foreign currencies to unexpected exchange rate changes
D)the potential that the firm's consolidated financial statement can be affected by changes in exchange rates

Question 15

The expected value of the investment in Canadian dollars is:

A)$3,000
B)$4,950
C)$5,155
D)$5,550

Question 16

Exposure to currency risk can be measured by the sensitivities of

A)the future home currency values of the firm's assets and liabilities
B)the firm's operating cash flows to random changes in exchange rates
C)a and b
D)none of these

Question 17

The variance of the exchange rate is:

A)0.065058
B)0.056058
C)0.075058
D)0.085058

Question 18

Operating exposure can be managed by:

A)flexible sourcing policy
B)diversification of the market
C)financial hedging
D)all of these

Question 19

The "exposure" (i.e.the regression coefficient beta)is:
Hint:
Calculate the expression Cov(P,S)/Var(S)

A)128.98
B)1,289.80
C)12,898.00
D)none of these

Question 20

Which of the following is not a strategy for managing operating exposure

A)Financial hedging
B)Diversification of the market
C)Lowering sale prices
D)Product differentiation

Question 21

Banff Inc.is headquartered in Calgary and produces high-end living room furniture.The firm has a subsidiary in Germany.The wooden frames of the sofas are made in Calgary by an independent contractor and then shipped to Germany.The German subsidiary then upholsters the sofas using Belgium fabrics.Each frame costs the subsidiary C$1,500.The materials and labour for the upholstery amount to euro 2,000 per sofa.Fixed overhead costs are euro 1,500,000 for the subsidiary.Banff Inc.expects to be able to sell 3,000 Sofas for 5,000 euros each.The firm can depreciate 1,000,000 euros per year.The German income tax rate is 40%.The current exchange rate is C$1.5/euro.How would the operating cash flows (expressed in Canadian dollars)change if the exchange rate is C$1.6/euro,all else equal?

Question 22

Banff Inc.is headquartered in Calgary and produces high-end living room furniture.The firm has a subsidiary in Germany.The wooden frames of the sofas are made in Calgary by an independent contractor and then shipped to Germany.The German subsidiary then upholsters the sofas using Belgium fabrics.Each frame costs the subsidiary C$1,500.The materials and labour for the upholstery amount to euro 2,000 per sofa.Fixed overhead costs are euro 1,500,000 for the subsidiary.Banff Inc.expects to be able to sell 3,000 Sofas for 5,000 euros each.The firm can depreciate 1,000,000 euros per year.The German income tax rate is 40%.The current exchange rate is C$1.5/euro.How would the operating cash flows (expressed in Canadian dollars)change if the exchange rate is C$1.4/euro,all else equal?

Question 23

ABC Inc.,a Canadian paper manufacturer,has a subsidiary in the United States which sources its wood from Canada.The US dollar depreciates rapidly.Discuss the likely competitive and conversion effects of the depreciation of the US dollar.

Question 24

How can operating exposure be managed?

Question 25

Banff Inc.is headquartered in Calgary and produces high-end living room furniture.The firm has a subsidiary in Germany.The wooden frames of the sofas are made in Calgary by an independent contractor and then shipped to Germany.The German subsidiary then upholsters the sofas using Belgium fabrics.Each frame costs the subsidiary C$1,500.The materials and labour for the upholstery amount to euro 2,000 per sofa.Fixed overhead costs are euro 1,500,000 for the subsidiary.Banff Inc.expects to be able to sell 3,000 Sofas for 5,000 euros each.The firm can depreciate 1,000,000 euros per year.The German income tax rate is 40%.The current exchange rate is C$1.5/euro.How would the operating cash flows (expressed in Canadian dollars)change if the exchange rate is C$1.4/euro,the German inflation rate is 3% but the firm will not be able to raise the price for its products and due to new competition from the Russian market (with a more favorable exchange rate)unit sales drop to 2,500?