Deck 6: Currency Risk Exposure Measurement

Question 1

For each transaction undertaken by a firm that involves currency risks,three factors must be considered:

A)kind of transaction (loan or borrowing),interest rate,and volatility of the currency involved.
B)amount involved,timing of the transaction,and volatility of the currency involved.
C)amount involved,interest rate,and timing of the transaction.
D)kind of transaction (loan or borrowing),timing of the transaction,and volatility of the currency involved.

Answer 1

amount involved,timing of the transaction,and volatility of the currency involved.

Question 2

For purposes of determining standard deviation,the variance of a currency is:

A)the square root of the variance of the currency.
B)an average of the deviations from the currency.
C)plus or minus the average value of the currency over a specific period.
D)the average of squared deviations from the mean.

Answer 2

the average of squared deviations from the mean.

Question 3

Calculation of the standard deviation of a currency addresses the potential differences in results for high-value and low-value currencies by:

A)averaging the exchange rates of the currency over a specific period of time.
B)discounting the standard deviation of high-value currency.
C)converting currency values into currency returns,which are percentage changes in currency values.
D)adjusting the standard deviation of both currencies when comparing high- and low-value currencies.

Answer 3

converting currency values into currency returns,which are percentage changes in currency values.

Question 4

Countries with floating exchange rates have currencies:

A)whose values rarely change.
B)that are subject to value changes at regular intervals.
C)that are controlled by currency boards with a great deal of power.
D)whose values may change as economic conditions and market sentiments change.

Question 5

The use of standard deviation as a measure of currency risk assumes that currency changes are independent.This means that:

A)a currency change is not related to the change in value of any other currency.
B)a currency change is not in the same percentage as the most recent currency change.
C)each currency change is unrelated to previous or subsequent currency changes.
D)each currency change occurs in a different time period than the prior currency change.

Question 6

In general,currency value changes:

A)very little over a year's time.
B)by 10% or more each year.
C)significantly but the positive changes cancel the negative changes.
D)by a few percentages in a year but very seldom more than 5% in any one year.

Question 7

The impact of currency value on liquid financial assets and contractual cash flow is measured by:

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

Question 8

Changes in the value of currencies:

A)occur only in floating currency systems.
B)can occur in floating currency systems,in managed floating systems,and even in fixed systems.
C)occur only in floating and managed floating currency systems.
D)occur uniformly in all currency systems.

Question 9

Economic exposure as an aspect of currency risks involves:

A)the impact of worldwide economic changes on a firm's profitability.
B)the impact of currency changes on a firm's overall cash flow.
C)how a firm reacts to negative external economic shocks.
D)the effect of currency changes on a firm's profit and loss statement.

Question 10

The calculation of the standard deviation of a currency is based on:

A)a time series of the values of that currency.
B)the changes in the exchange rate of that currency annually of a specified number of years.
C)the average exchange rates of the currency over a specified period.
D)the exchange rate of the currency at a specific point in time.

Question 11

____________ exposure is an analysis of the effects of currency changes on a firm's operating cash flow.

A)Operating
B)Cash flow
C)Translation
D)Profit

Question 12

The direct effect of currency volatility on a firm can be seen in:

A)the other firms that it contracts with and the terms of those contracts.
B)analyzing the countries where it does business.
C)its accounting record and formal contracts.
D)considering the country that it elects to consider its headquarters.

Question 13

The three primary types of exposure that currency risks create for a firm are:

A)transaction exposure,interest rate exposure,and translation exposure.
B)profit/loss exposure,interest rate exposure,and economic exposure.
C)economic exposure,financial exposure,and translation exposure.
D)transaction exposure,economic exposure,and translation exposure.

Question 14

One way to infer future currency volatility is to consider:

A)the spot rate of the currency since it incorporates all information known about the currency.
B)currency option prices since they estimate future currency volatility rather than report past currency volatility.
C)the history of the volatility of the currency since that suggests the future of the currency.
D)how currency volatility has affected the firm in the past.

Question 15

The highest standard deviations are found in:

A)emerging countries where the currency is pegged to the currency of an industrialized nation.
B)emerging countries where currencies are allowed to float freely.
C)industrialized countries where there is great economic activity.
D)industrialized countries where the currency is pegged.

Question 16

Which risk do experts generally agree is the most important for firms and why?

A)Economic risks because the economy is a primary determinant in the success of a firm.
B)Currency risks because all firms deal in currencies.
C)Transaction risks because transactions are where firms make their profits or suffer their losses.
D)Interest rate risks because interest rates affect firms in a number of different ways.

Question 17

The formula for converting currency values into currency returns is:

A)(S_t + S_t-1)/2
B)(S_t/S_t-1)- 1
C)(S_t-1/S_t)- 1
D)(S_t-1/S_t)+ 1

Question 18

The standard deviation of a currency is:

A)plus or minus the average value of the currency over a specific period.
B)square root of the variance of the currency.
C)the average of squared deviations from the mean.
D)an average of the deviations from the currency.

Question 19

________________ are subject to currency risks.

A)All firms
B)Only MNCs
C)All MNCs and many domestic firms
D)Only foreign-based firms

Question 20

One of the implicit assumptions in using standard deviation as a measure of currency risk is that:

A)currency changes occur randomly in no discernable pattern.
B)only one currency can be considered at any one point in time.
C)the currency being considered has been actively traded in the currency markets for at least ten years.
D)currency changes are normally distributed,which means that currency changes occur in a regular pattern.

Question 21

In netting cash flow across time,the scenario that assumes that the interest rate is zero:

A)is not a valid scenario for estimating currency risk.
B)is valid because interest rates generally do not affect cash flow.
C)underestimates the currency risk involved in the situation being analyzed.
D)is easy to use,but only makes sense where the interest rate does not affect the estimation of the currency risk.

Question 22

The risks posed to a firm's operating cash flow by currency-related changes is called:

A)operating exposure.
B)currency risks.
C)economic exposure.
D)transaction risks.

Question 23

In a competitive market,the effect of a currency change for a price follower is that:

A)sales may be lost,so operating exposure is high.
B)the change may or not affect the foreign cash flow of the firm if the firm can effectively and efficiently change its prices.
C)increased cash flow can offset the conversion impact,so operating exposure is low.
D)since price followers do whatever the market dictates,operating exposure is low.

Question 24

When a firm analyzes its situation and determines the maximum likely losses that it can incur in that situation,it has determined it's:

A)value at risk.
B)risk quotient.
C)loss limit.
D)transaction exposure.

Question 25

Consolidation of cash flows occurring at different times is made possible by using the:

A)time value principles that determine the present value of cash flow to be received in the future.
B)absolute values of the cash flow no matter when it is to be received.
C)principle that future cash flow is unreliable and can be disregarded.
D)the average of the cash flows to be received.

Question 26

Operating exposure differs from transaction exposure because:

A)transaction exposure focuses on short-term and contractual cash flow while operating exposure considers all cash flow.
B)operating exposure considers only changes in exchange rates while transaction exposure considers the underlying profit in the transaction plus changes in the exchange rate.
C)transaction exposure considers only changes in exchange rates while operating exposure considers the underlying profit in the transaction plus changes in the exchange rate.
D)operating exposure focuses on short-term and contractual cash flow while transaction exposure considers all cash flow.

Question 27

In the Markowitz Portfolio Approach,risk is reduced by:

A)the diversification of assets.
B)the correlation between assets.
C)investing in arrangements that return cash to the firm at different times.
D)investing in real assets rather than derivatives.

Question 28

Operating exposure for a firm is determined by the:

A)general performance of the currency markets.
B)time series of the values for the currencies in which it deals.
C)currencies in which it incurs costs and earns revenues.
D)policies of the firm with regard to risk-taking.

Question 29

Using the Markowitz Portfolio Approach,diversification:

A)increases risks and low correlation between assets indicates diversification potential,so low correlation between assets suggests that a firm is in a risk-prone position.
B)increases risks and high correlation between assets indicates low diversification potential,so firms with low correlations have undertaken too much risk.
C)reduces risk and low correlation between assets indicates diversification potential,so low correlation between assets offers a firm the opportunity to reduce risks.
D)reduces risk and low correlation between assets indicates a lack of diversification,so low correlation between assets indicates that the firm needs to reconsider its risks.

Question 30

One of the results of exchange rate changes that operating exposure considers is:

A)how currency changes affect manufacturing costs.
B)how currency changes affect unit sales.
C)whether currency changes are positive or negative.
D)if currency changes are short-term or long-term.

Question 31

If risk valuation is based on a time series of value changes in the asset being considered,the approach is called a _______________ approach.

A)delta-normal.
B)value neutral.
C)historical simulation.
D)normal distribution.

Question 32

___________________ is the component of operating exposure that involves the conversion of a firm's foreign cash flow into the home country currency of the firm.

A)Operating impact
B)Transaction exposure
C)Conversion impact
D)Currency impact

Question 33

The Markowitz Portfolio Approach was primarily developed for analyzing equity portfolios:

A)so it is of little use in evaluating currency portfolios.
B)but it can be used effectively in evaluating currency portfolios.
C)but it can be used to evaluate transaction exposure.
D)and it cannot be used to evaluate transaction exposure.

Question 34

Currency exposure can be difficult to estimate because a firm is likely to be involved in multiple transactions in a currency at different times.This complication can be made simpler by:

A)eliminating the transactions at the extremes and focusing on the average transactions.
B)considering only the transaction that occur within a very short period of time.
C)considering only representative transactions.
D)netting the transactions so that the focus can be on the net effect of the transactions.

Question 35

In assessing a position or an asset,the commonly assumed probability for unlikely outcomes is ____,which means that:

A)5%;%5 of possible outcomes should be considered as likely.
B)25%;75% of possible outcomes should be considered as likely.
C)5%;95% of possible outcomes should be considered as likely.
D)25%;25% of possible outcomes should be considered as likely.

Question 36

Can currency changes affect operating cash flow of a domestic firm?

A)Yes,because there really is no firm that is purely domestic and all firms deal in buying or selling in foreign currencies.
B)No,domestic firms are those that only deal in the currency of the country where they are located,so changes in currency values cannot affect them.
C)No,domestic firms are protected form changes in currency values by the government of the country where they operate.
D)Yes,since domestic firms may deal in products that are based on a foreign currency and may be affected by changes in the value of that foreign currency.

Question 37

The approach to risk valuation that assumes that changes in value of the asset being considered are normally distributed is called the:

A)value neutral approach.
B)delta-normal approach.
C)normal distribution theory.
D)historical simulation theory.

Question 38

The Markowitz Portfolio Approach considers:

A)the value of currency currently compared to the value of currency at specific points in the past.
B)the value of currency currently compared to estimates of the value at specific points in the future.
C)why firms engage in risky transactions.
D)the interactions between assets in determining risks.

Question 39

The use of scenario analysis is best suited for situations where:

A)the currency involved is a major currency.
B)the firm involved is an MNC.
C)only one currency is involved.
D)the firm involved is a domestic firm engaging in a foreign transaction.

Question 40

The Markowitz Portfolio Approach suggests that:

A)diversification reduces currency risk.
B)cooperation reduces currency risk.
C)currency risk cannot be reduced.
D)currency risk and transaction risk are the same things.

Question 41

The Markowitz Portfolio Approach says that diversification of assets diminishes risk.What does that mean in the context of international financial transactions?

Question 42

__________________ is a measure of the impact of currency values on the financial statements of a firm.

A)Translation exposure
B)Operating exposure
C)Transaction exposure
D)Accounting exposure

Question 43

Of all of the macroeconomic risks that firms face,which risk do experts generally agree is the most important for firms and why?

Question 44

Revenues and expenses are translated using ________________,and assets and liabilities are translated using _______________________.

A)exchange rates at the reporting date;average exchange rates for the period
B)whichever exchange rate is most advantageous for the firm;average exchange rates for the period
C)average exchange rates for the period;exchange rates at the reporting date
D)exchange rates at the reporting date;whichever exchange rate is most advantageous for the firm

Question 45

When a firm's competitive position in its industry deteriorates because of changes in currency value,that change is known as:

A)industry exposure.
B)currency exposure.
C)competitive exposure.
D)market exposure.

Question 46

One way to infer future currency volatility is to consider currency option prices since they estimate future currency volatility rather than report past currency volatility.How do current currency option prices indicate currency volatility?

Question 47

Purely domestic firms do not have any ____________ exposure,but they do have ___________________ exposure.

A)currency;operating
B)transaction;operating
C)operating;translation
D)market;currency

Question 48

What is the difference between operating exposure and transaction exposure?

Question 49

How does conversion impact affect a firm's operating exposure?

Question 50

If the currency in which costs of an MNC are denominated rises in value,the operating cash flow of the MNC may be adversely affected because:

A)its cost rise and its competitive position improves but not enough to offset the increase in costs.
B)its cost increase and its competitive position deteriorates.
C)its costs decrease and its competitive position deteriorates more than it saves for the decrease in costs.
D)its costs decrease and its competitive position deteriorates.