Question 1

Appreciation in a firm's local currency causes a(n)__________ in cash inflows and a(n)_________ in cash outflows.
A) reduction;reduction
B) increase;increase
C) increase;reduction
D) reduction;increase

Accepted Answer

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

Question 2

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.
A) greater;smaller
B) smaller;greater
C) greater;greater
D) none of the above

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.

Question 3

The maximum one-day loss computed for the value-at-risk (VAR)method,does not depend on:
A) the expected percentage change in the currency for the next day.
B) the standard deviation of the daily percentage changes in the currency over a previous period.
C) the current level of interest rates.
D) the confidence level used.

Accepted Answer

The maximum one-day loss computed for the VAR method depends on the expected percentage change in the currency, the standard deviation of the daily percentage changes in the currency over a previous period, and the confidence level used. However, it does not depend on the current level of interest rates.

Question 4

Subsidiary A of Mega Corporation has net inflows in Australian dollars of A$1,000,000,while Subsidiary B has net outflows in Australian dollars of A$1,500,000.The expected exchange rate of the Australian dollar is $.55.What is the net inflow or outflow as measured in U.S.dollars
A) $500,000 outflow.
B) $500,000 inflow.
C) $275,000 inflow.
D) $275,000 outflow.

Accepted Answer

To convert the net inflows/outflows from Australian dollars to U.S. dollars, we need to multiply by the exchange rate. 
For Subsidiary A, the net inflows of A$1,000,000 would be worth $550,000 (A$1,000,000 x $0.55) in U.S. dollars.
For Subsidiary B, the net outflows of A$1,500,000 would be worth -$825,000 (A$1,500,000 x $0.55) in U.S. dollars since it is an outflow.
Therefore, the net inflow/outflow in U.S. dollars is:
$550,000 - $825,000 = -$275,000 or $275,000 outflow. 
So, the correct answer is D.

Question 5

Under FASB 52,consolidated earnings are sensitive to the functional currency's weighted average exchange rate.

Accepted Answer

Under FASB 52 (ASC 830), consolidated earnings are sensitive to the functional currency's weighted average exchange rate because the financial statements of a foreign subsidiary are translated into the parent's reporting currency using the weighted average exchange rate during the period. Any changes in exchange rates will impact the translation adjustment and, hence, affect consolidated earnings.

Question 6

______________ is(are)not a determinant of translation exposure.
A) The MNC's degree of foreign involvement
B) The locations of foreign subsidiaries
C) The local (domestic) earnings of the MNC
D) The accounting methods used

Accepted Answer

Translation exposure, also known as accounting exposure, refers to the impact of currency exchange rate changes on the reported financial statements of a company. It primarily concerns the conversion of foreign operations into the parent company's reporting currency. The local (domestic) earnings of the MNC are not directly affected by exchange rate changes in the context of translation exposure, as it pertains to foreign operations and their conversion into the parent company's currency for reporting purposes.

Question 7

Assume that Mill Corporation,a U.S.-based MNC,has applied the following regression model to estimate the sensitivity of its cash flows to exchange rate movements:
$ P C F_{t}=a_{0}+a_{1} e_{t}+\mu t $ 
where the term on the left-hand side is the percentage change in inflation-adjusted cash flows measured in the firm's home currency over period t,and $ e_{t} $ is the percentage change in the exchange rate of the currency over period t.The regression model estimates a coefficient of
$ a_{1} $ of 2.This indicates that:
A) if the foreign currency appreciates by 1%, Mill's cash flows will decline by 2%.
B) if the foreign currency appreciates by 1%, Mill's cash flows will decline by .2%.
C) if the foreign currency depreciates by 1%, Mill's cash flows will increase by 2%.
D) if the foreign currency depreciates by 1%, Mill's cash flows will decline by 2%.
E) none of the above

Accepted Answer

The answer of Assume that Mill Corporation,a U.S.-based MNC,has applied...

Question 8

If an MNC expects cash inflows of equal amounts in two currencies,and the two currencies are ___________ correlated,the MNC's transaction exposure is relatively ___________.
A) negatively;high
B) negatively;low
C) positively;low
D) none of the above

Accepted Answer

If the two currencies are negatively correlated, it means that when one currency strengthens, the other weakens. This can help offset potential losses from fluctuations in currency exchange rates, resulting in a relatively low transaction exposure for the MNC.

Question 9

___________ exposure is the degree to which the value of future cash transactions can be affected by exchange rate fluctuations.
A) Transaction
B) Economic
C) Translation
D) None of the above

Accepted Answer

Transaction exposure refers to the risk that the value of future cash transactions will be affected by changes in exchange rates.

Question 10

Cerra Co.expects to receive 5 million euros tomorrow as a result of selling goods to the Netherlands.Cerra estimates the standard deviation of daily percentage changes of the euro to be 1 percent over the last 100 days.Assume that these percentage changes are normally distributed.Using the value-at-risk (VAR)method based on a 95% confidence level,what is the maximum one-day loss in dollars if the expected percentage change of the euro tomorrow is 0.5% The current spot rate of the euro (before considering the maximum one-day loss)is $1.01.
A) -$75,750.
B) -$60,600.
C) -$111,100.
D) -$25,250.

Accepted Answer

First, we convert the 5 million euros to dollars using the current spot rate:
5,000,000 euros * $1.01/euro = $5,050,000

Next, we calculate the maximum one-day loss at a 95% confidence level using the VAR method:
VAR = expected percentage change * standard deviation * portfolio value
where portfolio value is the amount of euros that will be converted to dollars tomorrow.

Expected percentage change = 0.5%
Standard deviation = 1%
Portfolio value = 5,000,000 euros = $5,050,000

VAR = 0.5% * 1% * $5,050,000 = $25,250

Finally, we subtract the VAR from the portfolio value to get the maximum one-day loss:
$5,050,000 - $25,250 = $5,024,750

Therefore, the maximum one-day loss in dollars is -$60,600 (Choice B).

Question 11

Volusia,Inc.is a U.S.-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 dollar 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
A) 3.00%.
B) 5.44%.
C) 17.98%.
D) none of the above

Accepted Answer

The portfolio standard deviation can be calculated using the following formula:
Portfolio SD = [(w1 * SD1)^2 + (w2 * SD2)^2 + 2 * w1 * w2 * SD1 * SD2 * p]^(1/2)
where 
w1 and w2 are the weights of Euro and Canadian dollar in the portfolio, respectively; 
SD1 and SD2 are the standard deviations of the monthly percentage changes for Euro and Canadian dollar, respectively; 
p is the correlation coefficient between Euro and Canadian dollar.

Let's assume that Volusia will split the portfolio equally between euros and Canadian dollars, so w1 = w2 = 0.5

Using the given data, we can calculate the portfolio standard deviation as follows:

Portfolio SD = [(0.5 * 8%)^2 + (0.5 * 3%)^2 + 2 * 0.5 * 0.5 * 8% * 3% * 0.3]^(1/2) = 5.44%

Therefore, the best choice is B, with a portfolio standard deviation of 5.44%.

Question 12

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.
A) be hurt by;appreciated
B) benefit from;depreciated
C) be hurt by;depreciated
D) none of the above

Accepted Answer

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

Question 13

If the U.S.dollar appreciates:
A) an MNC's U.S. sales will probably decrease.
B) an MNC's exports denominated in U.S. dollars will probably increase.
C) an MNC's interest owed on foreign funds borrowed will probably increase.
D) an MNC's exports denominated in foreign currencies will probably increase.
E) all of the above

Accepted Answer

The answer of If the U.S.dollar appreciates:
A) an MNC's U.S....

Question 14

Cerra Co.expects to receive 5 million euros tomorrow as a result of selling goods to the Netherlands.Cerra estimates the standard deviation of daily percentage changes of the euro to be 1 percent over the last 100 days.Assume that these percentage changes are normally distributed.Using the value-at-risk (VAR)method based on a 95% confidence level,what is the maximum one-day loss if the expected percentage change of the euro tomorrow is 0.5%
A) -0.5%
B) -2.2%
C) -1.5%
D) -1.2%

Accepted Answer

The maximum one-day loss at a 95% confidence level is calculated as the expected change minus 1.65 times the standard deviation (since 1.65 is the z-score for 95% confidence in a normal distribution). Thus, 0.5% - (1.65 * 1%) = -1.15%, which rounds to -1.2%.

Question 15

Volusia,Inc.is a U.S.-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 dollar 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.Assuming an expected percentage change of 0 percent for each currency during the next month,what is the maximum one-month loss of the currency portfolio Use a 95 percent confidence level and assume the monthly percentage changes for each currency are normally distributed.
A) -9.00%.
B) -30.00%.
C) -5.00%.
D) none of the above

Accepted Answer

The correct answer is A because the maximum one-month loss of the currency portfolio is -9.00%. This is calculated using the formula:Maximum loss = -Z * sqrt(Var(euro) + Var(Canadian dollar) + 2 * Corr(euro, Canadian dollar) * Var(euro) * Var(Canadian dollar))where:Z = the z-score for the desired confidence level (95% in this case)Var(euro) = the variance of the monthly percentage changes for the euroVar(Canadian dollar) = the variance of the monthly percentage changes for the Canadian dollarCorr(euro, Canadian dollar) = the correlation coefficient between the euro and the Canadian dollarPlugging in the values given in the question, we get:Maximum loss = -1.96 * sqrt(0.08^2 + 0.03^2 + 2 * 0.30 * 0.08 * 0.03) = -9.00%

Question 16

Dubas Co.is a U.S.-based MNC that has a subsidiary in Germany and another subsidiary in Greece.Both subsidiaries frequently remit their earnings back to the parent company.The German subsidiary generated a net outflow of €2,000,000 this year,while the Greek subsidiary generated a net inflow of €1,500,000.What is the net inflow or outflow as measured in U.S.dollars this year The exchange rate for the euro is $1.05.
A) $3,675,000 outflow
B) $525,000 outflow
C) $525,000 inflow
D) $210,000 outflow

Accepted Answer

To convert the net inflows/outflows in euros to U.S. dollars, we need to multiply them by the exchange rate of $1.05 per euro.

Net outflow from Germany = €2,000,000 
Converted to USD = €2,000,000 x $1.05 = $2,100,000

Net inflow from Greece = €1,500,000 
Converted to USD = €1,500,000 x $1.05 = $1,575,000

Total net inflow/outflow in USD = $1,575,000 - $2,100,000 = -$525,000

Therefore, the net inflow/outflow as measured in U.S. dollars this year is a net outflow of $525,000 (option B).

Question 17

The following regression model was run by a U.S.-based MNC to determine its degree of economic exposure as it relates to the Australian dollar and Sudanese dinar (SDD):
$$
P C F_{t}=a_{0}+a_{1} e_{t}+\mu_{t}
$$
where the term on the left-hand side is the percentage change in inflation-adjusted cash flows measured in the firm's home currency over period $ t $, and $ e_{t} $ is the percentage change in the exchange rate of the currency over period $ t $. The regression was run over two subperiods for each of the two currencies, with the following results:

Based on these results,which of the following statements is probably not true?
A) The MNC was more sensitive to movements in the Australian dollar than in the dinar in the earlier subperiod.
B) The MNC was more sensitive to movements in the dinar than in the Australian dollar in the more recent subperiod.
C) The MNC probably had more outflows than inflows in Australian dollars in the earlier subperiod.
D) The MNC probably had more inflows than outflows denominated in dinar in the more recent subperiod.
E) All of the above are true.

Accepted Answer

From the regression results, we can see that in the earlier subperiod for the Australian dollar, the coefficient estimate for the exchange rate variable is negative (-0.575). This means that the MNC had more inflows than outflows in Australian dollars, as a weaker Australian dollar (represented by a negative percentage change in the exchange rate) would lead to higher cash flows for the MNC (represented by a positive percentage change in the inflation-adjusted cash flows). Therefore, statement C is probably not true as it suggests the opposite. Statements A, B, and D are all supported by the regression results.

Question 18

One argument for exchange rate irrelevance is that:
A) MNCs can hedge exchange rate exposure much more effectively than individual investors.
B) diversified stakeholders will not be affected by exchange rate movements because of offsetting effects.
C) purchasing power parity does not hold very well.
D) MNCs are typically not diversified across numerous countries.

Accepted Answer

Diversified stakeholders may experience offsetting effects from exchange rate movements, making the exchange rate less relevant to them.

Question 19

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.
A) high;positively
B) low;negatively
C) high;negatively
D) none of the above

Accepted Answer

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

Question 20

Which of the following is not a form of exposure to exchange rate fluctuations
A) transaction exposure.
B) credit exposure.
C) economic exposure.
D) translation exposure.

Accepted Answer

Credit exposure refers to the risk of default on a loan or other form of credit. It is not directly related to exchange rate fluctuations. Transaction, economic, and translation exposures are all forms of exposure to exchange rate fluctuations.

Quiz 10: Measuring Exposure to Exchange Rate Fluctuations

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

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.

The maximum one-day loss computed for the value-at-risk (VAR) method,does not depend on:

Subsidiary A of Mega Corporation has net inflows in Australian dollars of A$1,000,000,while Subsidiary B has net outflows in Australian dollars of A$1,500,000.The expected exchange rate of the Australian dollar is $.55.What is the net inflow or outflow as measured in U.S.dollars

Under FASB 52,consolidated earnings are sensitive to the functional currency's weighted average exchange rate.

______________ is(are) not a determinant of translation exposure.

If an MNC expects cash inflows of equal amounts in two currencies,and the two currencies are _ correlated,the MNC's transaction exposure is relatively _.

___________ exposure is the degree to which the value of future cash transactions can be affected by exchange rate fluctuations.

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.

If the U.S.dollar appreciates:

One argument for exchange rate irrelevance is that:

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.

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

Quiz 10: Measuring Exposure to Exchange Rate Fluctuations

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

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.

The maximum one-day loss computed for the value-at-risk (VAR) method,does not depend on:

Subsidiary A of Mega Corporation has net inflows in Australian dollars of A$1,000,000,while Subsidiary B has net outflows in Australian dollars of A$1,500,000.The expected exchange rate of the Australian dollar is $.55.What is the net inflow or outflow as measured in U.S.dollars

Under FASB 52,consolidated earnings are sensitive to the functional currency's weighted average exchange rate.

______________ is(are) not a determinant of translation exposure.

If an MNC expects cash inflows of equal amounts in two currencies,and the two currencies are ___________ correlated,the MNC's transaction exposure is relatively ___________.

___________ exposure is the degree to which the value of future cash transactions can be affected by exchange rate fluctuations.

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.

If the U.S.dollar appreciates:

One argument for exchange rate irrelevance is that:

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.

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

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

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.

If an MNC expects cash inflows of equal amounts in two currencies,and the two currencies are _ correlated,the MNC's transaction exposure is relatively _.

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.

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.