Question 1

Two highly negatively correlated currencies act almost as if they are the same currency.

Accepted Answer

The answer of Two highly negatively correlated currencies act almost...

Question 2

Appreciation in a firm's local currency causes a(n) ____ in cash inflows and a(n) ____ in cash outflows.

Accepted Answer

The answer of Appreciation in a firm's local currency causes...

Question 3

Volusia, plc is a UK-based exporting firm that expects to receive payments denominated in both euros and Canadian dollars in one month. Based on today's spot rates, the pound value of the funds to be received is estimated at £500,000 for the euros and £300,000 for the Canadian dollars. Based on data for the last fifty months, Volusia estimates the standard deviation of monthly percentage changes to be 8 percent for the euro and 3 percent for the Canadian dollar. The correlation coefficient between the euro and the Canadian dollar is 0.30. What is the portfolio standard deviation?

Accepted Answer

The portfolio standard deviation can be calculated using the formula for the standard deviation of a two-asset portfolio: √[(w₁σ₁)² + (w₂σ₂)² + 2w₁w₂σ₁σ₂ρ], where w₁ and w₂ are the weights of the assets, σ₁ and σ₂ are the standard deviations, and ρ is the correlation coefficient. Here, w₁ = 500,000/800,000 = 0.625, w₂ = 300,000/800,000 = 0.375, σ₁ = 8%, σ₂ = 3%, and ρ = 0.30. Plugging these values into the formula gives a portfolio standard deviation of approximately 5.44%.

Question 4

A reduction in hedging will probably reduce transaction exposure.

Accepted Answer

Hedging is a strategy used to minimize or manage the risk of currency fluctuations, which directly affects transaction exposure. Reducing hedging activities would likely increase transaction exposure, not reduce it, because there would be less protection against currency value changes.

Question 5

If an MNC has a net inflow in one currency and a net outflow of about the same amount in another currency, then the MNCs' transaction exposure is ____ is the two currencies are ____ correlated.

Accepted Answer

The answer of If an MNC has a net inflow...

Question 6

Which of the following is not a form of exposure to exchange rate fluctuations?

Accepted Answer

Credit exposure is not related to exchange rate fluctuations; it pertains to the risk of a counterparty defaulting on a financial obligation.

Question 7

A firm produces goods for which substitute goods are produced in all countries. Appreciation of the firm's local currency should:

Accepted Answer

The answer of A firm produces goods for which substitute...

Question 8

The exposure of an MNC's consolidated financial statements to exchange rate fluctuations is known as transaction exposure.

Accepted Answer

The exposure of an MNC's consolidated financial statements to exchange rate fluctuations is known as translation exposure, not transaction exposure. Transaction exposure refers to the potential change in cash flows from individual transactions due to exchange rate movements.

Question 9

In general, a firm that concentrates on local sales, has very little foreign competition, and obtains foreign supplies (denominated in foreign currencies) will likely ____ a(n) ____ local currency.

Accepted Answer

The answer of In general, a firm that concentrates on...

Question 10

Diz ltd is a UK-based MNC with net cash inflows of euros and net cash inflows of Swiss francs. These two currencies are highly correlated in their movements against the dollar. Yanta ltd is a UK-based MNC that has the same level of net cash flows in these currencies as Diz ltd except that its euros represent net cash outflows. Which firm has a higher exposure to exchange rate risk?

Accepted Answer

Diz ltd has higher exposure to exchange rate risk because both its euro and Swiss franc cash flows are inflows, and since these currencies are highly correlated, any adverse movement against the dollar will affect both cash flows negatively. Yanta ltd, on the other hand, has euro outflows, which can offset the risk from Swiss franc inflows due to the correlation, reducing its overall exposure.

Question 11

Economic exposure refers to:

Accepted Answer

The answer of Economic exposure refers to:
...

Question 12

Which of the following operations benefits from appreciation of the firm's local currency?

Accepted Answer

Borrowing in a foreign currency and converting the funds to the local currency prior to the appreciation will benefit from appreciation of the firm's local currency.

Question 13

Firms with more in foreign costs than in foreign revenues will be favourably affected by a stronger foreign currency.

Accepted Answer

A stronger foreign currency would increase the cost of foreign expenses, negatively impacting firms with more foreign costs than revenues.

Question 14

The ____ the percentage of an MNC's business conducted by its foreign subsidiaries, the ____ the percentage of a given financial statement item that is susceptible to translation exposure.

Accepted Answer

The greater the percentage of an MNC's business conducted by its foreign subsidiaries, the greater the percentage of a given financial statement item that is susceptible to translation exposure, as more of the company's operations are influenced by changes in foreign exchange rates.

Quiz 10: Measuring Exposure to Exchange Rate Fluctuations

Two highly negatively correlated currencies act almost as if they are the same currency.

Appreciation in a firm's local currency causes a(n) in cash inflows and a(n) in cash outflows.