Deck 7: Currency Exposure Management

Question 1

If a firm cannot use available tax shields in the year those tax shields are available,what happens to the benefits of those tax shields?

A)The benefits are not lost or reduced because they can be used to offset or reduce future taxable income.
B)The benefits of the tax shields are always lost and cannot be taken advantage of in future years.
C)The benefits are allocated to other firms in the industry.
D)The benefits provided by the tax shields are either lost because the tax shield benefits expire or are reduced because the benefits are taken in later years.

Answer 1

The benefits provided by the tax shields are either lost because the tax shield benefits expire or are reduced because the benefits are taken in later years.

Question 2

Customers of a firm:

A)want income volatility for the firm because high income will allow the firm to spend more on innovation and improve the products that customers obtain from the firm.
B)want income volatility for the firm so that the customers can negotiate better deals with the firm.
C)are generally not concerned with the income stability or volatility of the firm.
D)want income stability for the firm so that they can be assured of a reliable supply of products from the firm.

Answer 2

want income stability for the firm so that they can be assured of a reliable supply of products from the firm.

Question 3

Firms can minimize income taxes by generating level taxable income from year to year because:

A)large swings in taxable income attract the attention of taxing officials and can trigger tax audits.
B)level taxable income from year to year makes computing income tax liability easier each year.
C)tax rates and tax laws change often and consistent levels taxable income usually mean that the effect of those changes on tax liability will be minimized.
D)income tax schemes are usually progressive and tax shields are only useful when a firm has taxable income.

Answer 3

income tax schemes are usually progressive and tax shields are only useful when a firm has taxable income.

Question 4

In the context of corporate finance,activities undertaken to reduce the variance of cash flow is called:

A)MNC management.
B)risk management.
C)hedging.
D)netting.

Question 5

Studies have shown that firms in industries producing primary products:

A)hedge more than firms in other industries.
B)hedge while firms in most other industries do not hedge very often.
C)hedge much less than firms in other industries.
D)hedge to the same extent as firms in other industries.

Question 6

In mitigating operating exposure,____________ are more relevant than ______________.

A)standard deviation;market inefficiencies
B)debt contracting;customer and supplier concerns
C)hedging;operating strategies
D)operating strategies;hedging

Question 7

A progressive income tax scheme means:

A)marginal income tax rates increase as taxable income increases.
B)marginal income tax rates decrease as taxable income increases.
C)income tax revenues are used for more productive purposes as tax revenues increase.
D)firms can receive rebates of taxes paid after tax revenues reach prescribed levels.

Question 8

Managers who receive stock options in their firms as part of their compensation may be most interested in:

A)level income in their firms because level income is an indication of stability and stability leads to higher stock prices.
B)income volatility in their firms because income volatility can lead to stock price volatility which can allow the exercise of stock options at times advantageous to the managers.
C)increasing income in their firms because increasing income leads to higher stock prices and an increasing value of their investment in the firm.
D)decreasing income in their firms because decreasing income leads to lower stock prices which gives the holders of stock options an opportunity to exercise those options at advantageous stock price levels.

Question 9

MNC's often use derivatives to control:

A)currency exposure.
B)management compensation.
C)operating exposure.
D)hedging.

Question 10

The facts that individual currency standard deviation is usually 5% to 15 % and that the standard deviation for other commodities used by a firm is usually much larger indicates that:

A)currency risks are the most important risk that any firm faces.
B)risks exist no matter what a firm does and efforts to reduce risks are generally ineffective.
C)currency risks are not as important to a firm as commodity price risks.
D)standard deviation is not a proper measure of risks faced by a firm.

Question 11

Using derivatives such as forwards,options and money markets to control currency exposure is called:

A)swapping.
B)gambling.
C)debt contracting.
D)hedging.

Question 12

Agency theory in firms suggests that:

A)owners of firms want to pursue risk-adverse policies to stabilize the firm's cash flow and increase the value of their ownership interests.
B)managers who hold stock in their firms will not pursue hedging opportunities because hedging minimizes risk and managers want higher earnings so that their compensation will increase.
C)managers who hold stock in their firms will pursue risk-adverse policies to reduce volatility of the firm's cash flow.
D)owners will want to pursue hedging strategies to safeguard the values of their investments in the firm.

Question 13

A reason for a firm to engage in hedging that does not arise within the firm is:

A)market inefficiencies that provide profitable opportunities through hedging.
B)regulatory requirements that favor firms that hedge against various exposures.
C)the possibility that currency fluctuations may affect future obligations of the firm.
D)that hedging may make the firm less attractive to another firm that is considering a hostile takeover of the firm.

Question 14

"On Balance Sheet Commitments" are:

A)items such as receivables that constitute a significant part of a firm's transaction exposure.
B)items such as inventory that is not involved in a firm's transaction exposure.
C)items in connection with which the firm has some liability.
D)obligations owed by a firm to another firm that depends on currency values at a particular time.

Question 15

The first step for a manager in dealing with the currency exposure of an MNC is to:

A)determine whether the estimated level of currency risk warrants mitigations efforts.
B)determine what strategies to use to reduce or eliminate currency risks.
C)decide whether currency risks arise from transaction or operating exposures.
D)analyze the options that are available to the firm and estimate the cost of pursuing each option.

Question 16

Most MNCs:

A)are large companies but do not engage in hedging.
B)are large companies and engage in hedging.
C)are not large companies but do engage in hedging.
D)are not large companies and do not engage in hedging.

Question 17

When a firm reduces its currency risk,it can better concentrate on its strategic plan and:

A)minimize its interest costs.
B)improve efficiency in operations.
C)maximize the use of tax shelters.
D)capture a larger share of its markets.

Question 18

Hedging to address mitigation of transaction exposure primarily focuses on:

A)risk management.
B)payables and receivables.
C)research and development costs.
D)taxable income.

Question 19

Examples of tax shields available to firms include:

A)interest income and investment income.
B)hedging expenses and tax-free income.
C)depreciation and interest paid.
D)bond issuance expenses and dividends paid.

Question 20

Studies have shown that investment opportunities in many industries are negatively correlated with industry cash flow.This means that:

A)firms that can maintain their cash flow when other firms in the industry are experiencing declining cash flow can take advantage of opportunities that other firms cannot pursue.
B)firms within a particular industry are destined to experience the same cash flow declines and increases as other firms in their industry experience.
C)investment opportunities within an industry increase when cash flow within the industry increases.
D)hedging is not a benefit to a firm if the general trend of cash flow within that industry is declining.

Question 21

In dealing with options,the strike price is:

A)the price that the parties negotiate the option price when the option is exercised.
B)the set price at which the option is exercised.
C)not relevant.
D)set by the seller of the currency subject to the option.

Question 22

In the context of international corporate finance,"repatriation" refers to:

A)repayment of funds owed to creditors in foreign countries.
B)payment of funds to foreign governments as compensation for the privilege of operating in those countries.
C)the recovery of investments made in foreign firms.
D)cash flows between parent and subsidiary corporations in the form of dividends,interest and fees.

Question 23

If hedging eliminates risk but results in lower cash flow than not hedging,whether a firm hedges or not depends on:

A)the anticipated changes in the exchange rate.
B)the firm's ability to increase cash flow from other sources.
C)the firm's risk-aversion and the firm's reason for considering hedging.
D)the anticipated changes in the forward rate.

Question 24

When a firm's currency position produces losses,if its hedge position is effective:

A)its derivatives will produce offsetting gains.
B)its derivative position will not be affected.
C)it can use those losses to offset taxable income from operations.
D)its on-balance sheet commitments will be reduced.

Question 25

Unlike the forward hedge,there are upfront cash flows related to the option premium,which means that:

A)the buyer or seller must pay a fee to buy or sell an option.
B)dealing with options always results in some loss of money.
C)money must be spent to buy the option or money is received on the sale of an option.
D)option results in the elimination of cash flow variables.

Question 26

When hedging economic exposures,firms often use a hedge that has a shorter term than the activity being hedged because:

A)maturity on economic exposures are often long-term and long-term hedges are expensive and involve more risk.
B)the firm wants the benefit of the hedge to mature before the economic exposure matures.
C)the maturity of the economic exposure is not known and the firm wants to be sure that the hedge is not longer than the economic exposure.
D)economic exposures are notoriously overstated and the firm wants to minimize the cost of the hedge.

Question 27

Because under parity the forward and the money market hedges provide identical outcomes,money market hedges are also known as:

A)symmetrical forward hedges.
B)synthetic forward hedges.
C)matching hedges.
D)asymmetrical forward hedges.

Question 28

Firms typically buy put options to hedge against:

A)payables.
B)inventory.
C)recessions.
D)receivables.

Question 29

A purchase or sale of a foreign currency in anticipation of a future transaction is a(n):

A)money market hedge.
B)forward hedge.
C)unhedged transaction.
D)currency hedge.

Question 30

A symmetric hedge is a:

A)fixed hedge that locks in currency values.
B)hedge that allows a firm to gain exactly as much as it loses on the exposure being hedged.
C)flexible hedge that allows currency values to be locked only when the firm pursuing the hedge decides to use the hedge.
D)flexible hedge that allows the currency values to change until a specified date in the future.

Question 31

Symmetric hedges use __________________,while asymmetric hedges usually use _____________________.

A)options;forwards and futures
B)currency swaps;options
C)forwards and futures;options
D)options;derivatives

Question 32

A potentially significant difference between using a forward hedge and a money market hedge is that the:

A)forward hedge is less risky.
B)money market hedge produces less cash flow.
C)forward hedge produces less cash flow.
D)money market hedge involves greater transaction costs.

Question 33

The purchase of an option is also known as a:

A)call.
B)put.
C)hedge.
D)match.

Question 34

Forward hedges can eliminate cash flow variability:

A)in most cases.
B)to some extent.
C)only occasionally.
D)completely.

Question 35

A call option puts a limit on cash outflow and:

A)reduces risk.
B)increases risk.
C)eliminates risk.
D)increases cash inflow.

Question 36

Firms select their hedging instruments based on:

A)the instruments sensitivity to the underlying currency.
B)the cost of the instruments.
C)the amount of exposure being hedged.
D)the availability of alternative choices.

Question 37

With respect to selecting hedging instruments,"matching" refers to:

A)how closely the cost of the hedging instrument relates to the amount involved in the exposure being hedged.
B)the relationship between the firm seeking to hedge an exposure and the firm offering the hedging instrument.
C)the relationship of the two countries whose currency is involved in the hedge.
D)how closely the currency and maturity of the hedging instrument lines up with the exposure being hedged.

Question 38

In a forward hedge,the cash flow equals:

A)the amount of the foreign currency used in the hedge times the forward rate.
B)the amount of the currency the firm usually transacts business in times the forward rate.
C)the unhedged cash flow times the forward rate.
D)the unhedged cash flow.

Question 39

A short position in a currency is:

A)a contract to buy that currency at some point in the future.
B)a contract to sell that currency at some point in the future.
C)an option to buy that currency at some point in the future.
D)an option to sell that currency at some point in the future.

Question 40

Hedging involves taking positions in derivative instruments that are ___________ a firm's currency position.

A)the same as
B)equal to
C)opposite to
D)not related to

Question 41

If the maturity of a currency position and the maturity of the hedging instrument are the same,then:

A)all risk is eliminated.
B)cash inflows and cash outflows are offsetting.
C)maturities match.
D)hedging is not necessary.

Question 42

A financial alternative dominates a second financial alternative,when the first alternative:

A)provides a higher cash flow for the same or lower risk compared to the second alternative.
B)costs less than the second alternative.
C)reduces the risks at all costs.
D)provides more assurance of success.

Question 43

How significant is currency risk compared to other risks that an MNC might face?

Question 44

In hedging,"delta" refers to:

A)the cost involved in acquiring hedging instruments.
B)the degree of risk that a particular hedging instrument addresses.
C)the difference between hedged cash flow and unhedged cash flow.
D)the sensitivity between the hedging instrument and the underlying currency.

Question 45

What steps can a firm take form an operational viewpoint to mitigate the exposure that it faces as a result of its business transactions?

Question 46

Maturities of hedging instruments and the maturity of currency exposures rarely are the same because:

A)maturities of hedging instruments are standardized and set by the exchanges where they are traded.
B)maturities of hedging instruments are not fixed and can change as circumstances change.
C)maturities of currency exposures are not fixed and can change as circumstances change.
D)the maturity of hedging instruments is not known when the hedging instruments are acquired.

Question 47

For a US-based MNC to rely on invoice currency to reduce transaction exposure means that the firm:

A)will invoice its customers in terms of US dollars.
B)will invoice its customers in the home currency of each customer.
C)will increase its cost related to collection of amounts owed to it.
D)will not be concerned about the currency in which its receivables are expressed.

Question 48

Why might an MNC have a currency exposure as the result of its business transactions?

Question 49

Why are firm managers generally considered to be risk-adverse?

Question 50

How does hedging assist a firm in reducing its currency exposure?