Question 1

A foreign exchange rate may be defined as&#10;A)the amount of a second currency one can buy with one unit of the first currency&#10;B)the interest rate of the overnight funds in the foreign country's money market&#10;C)the number of units of gold that can be bought in a foreign country for one unit of that country's currency&#10;D)the price of a futures contract in the financial futures market

Accepted Answer

A foreign exchange rate reflects the amount of one currency that can be exchanged for another currency. It is typically expressed as the amount of a second currency that one unit of the first currency can buy. For instance, if the exchange rate between the US dollar and the euro is 1.2, it means that one US dollar can be exchanged for 1.2 euros.

Question 2

One way for the U.S.importer to transfer foreign exchange risk to the German exporter is to&#10;A)sell the German exporter a futures contract&#10;B)increase the price of the merchandise&#10;C)have the invoice denominated in dollars&#10;D)both a and b

Accepted Answer

Having the invoice denominated in dollars means the German exporter bears the foreign exchange risk, as they will have to convert the payment from dollars to euros, potentially at a less favorable exchange rate.

Question 3

A major disadvantage of forward currency contracts is&#10;A)the margin that must be committed at the time one enters the contract&#10;B)standardized contract dollar amounts&#10;C)only three banks offer them in the U.S.&#10;D)none of the above

Accepted Answer

Forward currency contracts are customizable and do not require an upfront margin, and they are offered by a wide range of financial institutions, not just three banks in the U.S.

Question 4

Which of the following is NOT a negotiable contract term involved in a currency hedge:&#10;A)amount&#10;B)currency&#10;C)maturity&#10;D)none of the above

Accepted Answer

All of the options listed (amount, currency, maturity) are negotiable contract terms involved in a currency hedge, so the correct answer is none of the above (D).

Question 5

Economic exposure refers to the possibility that&#10;A)the dollar value of a U.S.importer's accounts payable denominated in French francs may change prior to currency conversion&#10;B)the dollar value of a U.S.multinational's balance sheet equity may change when the results of foreign subsidiaries are consolidated into dollars&#10;C)the long-term net present value of a firm's expected cash flows will change due to unexpected changes in exchange rates&#10;D)none of the above

Accepted Answer

Economic exposure refers to the impact of unexpected changes in exchange rates on a firm's future cash flows, which can affect the long-term net present value of those cash flows. Choices A and B refer to transaction exposure and translation exposure, respectively.

Question 6

The primary difference between a futures contract and a forward contract is:&#10;A)standardization&#10;B)futures contracts may only be purchased from banks&#10;C)forward contracts are not available in the U.S.&#10;D)a futures contract must be held to maturity

Accepted Answer

The primary difference between a futures contract and a forward contract is that futures contracts are standardized, meaning that the terms and conditions of the contract are predetermined by the exchange on which it trades, whereas forward contracts are customized to meet the specific needs of buyers and sellers. This standardization makes futures contracts more liquid and easier to trade than forward contracts. The other options given are incorrect - futures contracts can be purchased from a variety of sources, forward contracts are available in the U.S., and while futures contracts are typically settled by delivery, they can also be settled with a cash payment.

Question 7

Which of the following activities is least important relative to managing a company's liquidity?&#10;A)developing an information system to track cash flows in all currencies&#10;B)identifying transactions for which leading or lagging strategies could be implemented&#10;C)anticipating which of the foreign currencies in which a company does business will appreciate or depreciate&#10;D)managing translation exposure

Accepted Answer

Managing translation exposure is more about accounting and reporting practices than about managing day-to-day liquidity. Translation exposure affects how foreign currency financial statements are converted into the company's reporting currency and does not directly impact cash flow or liquidity management.

Question 8

The assets of a foreign subsidiary of a U.S.multinational corporation will experience a _____________________ if the foreign currency depreciates relative to the U.S.dollar,assuming that the dollar is the currency in which the parent company's assets are denominated.

A)transaction gain
B)transaction loss
C)translation gain
D)translation loss

Accepted Answer

When the foreign currency depreciates relative to the U.S. dollar, the value of the foreign subsidiary's assets, when translated into U.S. dollars, decreases, resulting in a translation loss.

Question 9

A quote for the amount of a currency that can be bought for immediate delivery is called a&#10;A)forward currency rate&#10;B)spot currency rate&#10;C)immediate currency rate&#10;D)instantaneous currency rate

Accepted Answer

A quote for the amount of a currency that can be bought for immediate delivery is called a spot currency rate. This is the current exchange rate for buying or selling a currency, and is different from a forward currency rate, which is a quote for a currency that will be delivered at a future date at a pre-determined price. Immediate currency rate and instantaneous currency rate are not commonly used terms in finance.

Question 10

Pooling systems in international banking structures are somewhat similar to:&#10;A)Bilateral netting&#10;B)concentration systems&#10;C)multilateral netting&#10;D)reinvoicing

Accepted Answer

Pooling systems in international banking structures are similar to concentration systems. Both systems involve the collection and centralization of funds from various sources into one account or location. Bilateral netting involves offsetting of obligations between two parties, while multilateral netting involves offsetting of obligations between multiple parties. Reinvoicing involves the transfer of goods or services between affiliated companies for tax or pricing purposes.

Question 11

In a forward currency contract,which of the following items are subject to negotiation?&#10;A)the amount&#10;B)the currency&#10;C)the maturity&#10;D)a and b&#10;E)a,b,and c

Accepted Answer

The answer of In a forward currency contract,which of the...

Question 12

The giro system that is commonplace in Europe is similar to the _______ in the US.&#10;A)postal system&#10;B)banking system&#10;C)non-bank financial institutions&#10;D)ACH system&#10;E)futures market

Accepted Answer

The answer of The giro system that is commonplace in...

Question 13

Which of the following is NOT used for managing exchange rate risk:&#10;A)pooling&#10;B)netting&#10;C)avoidance&#10;D)'a and 'c'

Accepted Answer

The answer of Which of the following is NOT used...

Question 14

Fluctuating exchange rates may be managed by:&#10;A)leading&#10;B)lagging&#10;C)'a' and 'b'&#10;D)none of the above

Accepted Answer

The answer of Fluctuating exchange rates may be managed by:&#10;A)leading&#10;B)lagging&#10;C)'a'...

Question 15

Prior to setting up an effective netting system,the company should know the&#10;A)current and expected daily cash flows of all currencies in which the company does business&#10;B)the economic exposure to all the currencies in which the company does business&#10;C)the translation exposure to all the currencies in which the company does business&#10;D)both b and c

Accepted Answer

The answer of Prior to setting up an effective netting...

Deck 17: Managing Multinational Cash Flows