Question 1

________ exposure deals with cash flows that result from existing contractual obligations.
A) Operating
B) Transaction
C) Translation
D) Economic

Accepted Answer

Transaction exposure deals with cash flows that result from existing contractual obligations, such as the payment or receipt of money in foreign currencies for transactions that a company has already entered into.

Question 2

Hedging, or reducing risk, is the same as adding value or return to the firm.

Accepted Answer

Hedging involves incurring an additional cost to reduce risk, which may lower potential returns. Therefore, it is not the same as adding value or return to the firm.

Question 3

Each of the following is another name for operating exposure EXCEPT:
A) economic exposure.
B) strategic exposure.
C) accounting exposure.
D) competitive exposure.

Accepted Answer

Accounting exposure refers to the impact of foreign exchange rate fluctuations on a firm's financial statements. Economic exposure, strategic exposure, and competitive exposure all refer to different aspects of operating exposure.

Question 4

MNE cash flows may be sensitive to changes in which of the following?
A) exchange rates
B) interest rates
C) commodity prices
D) all of the above

Accepted Answer

MNEs operate in various countries with different currencies, therefore exchange rate changes may affect their cash flows. Interest rates also have an impact on the cost of borrowing and the return on invested funds. Finally, MNEs may operate in industries that are dependent on commodity prices, such as oil or minerals, which can affect their revenues and expenses. Therefore, all options listed in the question may cause changes in MNEs cash flows.

Question 5

A ________ hedge refers to an offsetting operating cash flow such as a payable arising from the conduct of business.
A) financial
B) natural
C) contractual
D) futures

Accepted Answer

A natural hedge refers to an offsetting operating cash flow, such as a payable, that naturally arises from the normal operations of a business, without the need for entering into financial contracts.

Question 6

As a generalized rule, only realized foreign exchange losses are deductible for tax purposes.

Accepted Answer

This is a correct statement. Unrealized foreign exchange losses cannot be deducted for tax purposes until they are realized (i.e. the assets are sold or the liabilities are settled). This applies to individuals, corporations, and other entities subject to tax laws.

Question 7

Which of the following is cited as a good reason for NOT hedging currency exposures?
A) Shareholders are more capable of diversifying risk than management.
B) Currency risk management through hedging does not increase expected cash flows.
C) Hedging activities are often of greater benefit to management than to shareholders.
D) All of the above are cited as reasons NOT to hedge.

Accepted Answer

All of the options listed are commonly cited reasons against hedging currency exposures. Shareholders can diversify their own risk, hedging does not necessarily increase expected cash flows, and it may benefit management more than shareholders.

Question 8

Many MNE s manage foreign exchange exposure centrally, thus gains or losses are always matched with the country of origin.

Accepted Answer

While many MNEs manage foreign exchange exposure centrally to mitigate risks, gains or losses are not always matched with the country of origin due to the complexity of global operations and the use of various financial instruments and strategies across different currencies and countries.

Question 9

There is considerable question among investors and managers about whether hedging is a good and necessary tool.

Accepted Answer

Hedging is a debated topic and some argue that it can reduce potential profits, while others see it as a necessary tool to manage risk.

Question 10

________ exposure measures the change in the present value of the firm resulting from unexpected changes in exchange rates.
A) Operating
B) Transaction
C) Translation
D) Accounting

Accepted Answer

Operating exposure, also known as economic exposure, measures the change in the present value of a firm due to unexpected changes in exchange rates, affecting future cash flows and market value.

Question 11

Managers CAN outguess the market. If and when markets are in equilibrium with respect to parity conditions, the expected net present value of hedging should be POSITIVE.

Accepted Answer

When markets are in equilibrium with respect to parity conditions, the expected net present value of hedging is typically zero, not positive, because parity conditions imply that any potential gains from hedging or outguessing the market are already accounted for in current prices.

Question 12

Assuming no transaction costs (i.e., hedging is "free"), hedging currency exposures should ________ the variability of expected cash flows to a firm and at the same time, the expected value of the cash flows should ________.
A) increase; not change
B) decrease; not change
C) not change; increase
D) not change; not change

Accepted Answer

Hedging currency exposures involves taking positions in different currencies such that the losses or gains in one currency are offset by gains or losses in the other currency. This reduces the variability of expected cash flows as the impact of currency fluctuations on the cash flows is mitigated. At the same time, the expected value of the cash flows should not change as hedging only helps to reduce the impact of currency fluctuations and not the actual cash flows. So, the correct answer is that hedging should decrease the variability of expected cash flows to a firm and at the same time, the expected value of the cash flows should not change.

Question 13

Which of the following is NOT cited as a good reason for hedging currency exposures?
A) Reduced risk of future cash flows is a good planning tool.
B) Reduced risk of future cash flows reduces the probability that the firm may not meet required cash flows.
C) Currency risk management increases the expected cash flows to the firm.
D) Management is in a better position to assess firm currency risk than individual investors.

Accepted Answer

Hedging currency exposures reduces the risk of future cash flows (A and B) and allows management to assess and manage currency risk (D). It does not necessarily increase the expected cash flows to the firm (C), but rather helps to protect them from potential currency fluctuations.

Question 14

________ exposure is the potential for accounting-derived changes in owner's equity to occur because of the need to translate foreign currency financial statements into a single reporting currency.
A) Transaction
B) Operating
C) Economic
D) Accounting (aka translation)

Accepted Answer

Accounting exposure, also known as translation exposure, arises due to the need to convert financial statements denominated in foreign currencies into the reporting currency of the parent company. This can lead to fluctuations in the owner's equity due to changes in exchange rates, which can impact the consolidated financial statements.

Question 15

Shareholders are LESS capable of diversifying currency risk than is the management of the firm.

Accepted Answer

Shareholders have the option to invest in multiple companies and assets to diversify their currency risk, while the management of a firm has more control over the currency exposure of that specific firm. Therefore, shareholders are more capable of diversifying currency risk than the management of the firm.

Question 16

Management often conducts hedging activities that benefit management at the expense of the shareholders. The field of finance called agency theory frequently argues that management is generally LESS risk averse than are shareholders.

Accepted Answer

Agency theory often argues that management is more risk-averse than shareholders because managers have more of their personal wealth and human capital tied to the company, making them less willing to undertake risky projects that could jeopardize their employment or the stability of their compensation. Shareholders, on the other hand, can diversify their investment risk across multiple companies.

Question 17

Transaction exposure and operating exposure exist because of unexpected changes in future cash flows. The difference between the two is that ________ exposure deals with cash flows already contracted for, while ________ exposure deals with future cash flows that might change because of changes in exchange rates.
A) transaction; operating
B) operating; transaction
C) operating; accounting
D) none of the above

Accepted Answer

Transaction exposure deals with cash flows that are already contracted for, such as invoices or purchase orders denominated in a foreign currency. Operating exposure, on the other hand, deals with the risk of changes in future cash flows that might occur because of changes in exchange rates, such as changes in sales volumes, prices, or input costs due to fluctuations in currency values.

Question 18

Losses from ________ exposure generally reduce taxable income in the year they are realized. ________ exposure losses are not cash losses and therefore, are not tax deductible.
A) transaction; Operating
B) accounting; Operating
C) accounting; Transaction
D) transaction; Translation

Accepted Answer

Losses from transaction exposure generally reduce taxable income in the year they are realized. On the other hand, losses from translation exposure are not cash losses and therefore, are not tax-deductible. Accounting and operating exposures do not result in losses that are tax-deductible.

Question 19

The key arguments in opposition to currency hedging such as market efficiency, agency theory, and diversification do not have financial theory at their core.

Accepted Answer

The key arguments in opposition to currency hedging, such as market efficiency, agency theory, and diversification, do have financial theory at their core. Market efficiency suggests that attempting to outperform the market through currency hedging is futile, while agency theory argues that managers may not act in the best interest of shareholders when making hedging decisions. Diversification suggests that investors can mitigate currency risk by holding a globally diversified portfolio. These arguments are all based on financial theory.

Question 20

Losses from ________ exposure generally reduce taxable income in the year they are realized. ________ exposure losses may reduce taxes over a series of years.
A) accounting; Operating
B) operating; Transaction
C) transaction; Operating
D) transaction; Accounting

Accepted Answer

Losses from transaction exposure may reduce taxes over a series of years because they are related to foreign currency transactions and can have a long-term impact on the company's financial performance. On the other hand, operating exposure losses are related to the company's core operations and are typically one-time expenses that affect taxable income in the year they are realized. Accounting exposure refers to the impact of fluctuating currency exchange rates on a company's financial statements and does not directly affect taxable income.

Quiz 10: Transaction Exposure

________ exposure deals with cash flows that result from existing contractual obligations.

Hedging, or reducing risk, is the same as adding value or return to the firm.

Each of the following is another name for operating exposure EXCEPT:

MNE cash flows may be sensitive to changes in which of the following?

A ________ hedge refers to an offsetting operating cash flow such as a payable arising from the conduct of business.

As a generalized rule, only realized foreign exchange losses are deductible for tax purposes.

Which of the following is cited as a good reason for NOT hedging currency exposures?

Many MNE s manage foreign exchange exposure centrally, thus gains or losses are always matched with the country of origin.

There is considerable question among investors and managers about whether hedging is a good and necessary tool.

________ exposure measures the change in the present value of the firm resulting from unexpected changes in exchange rates.

Managers CAN outguess the market. If and when markets are in equilibrium with respect to parity conditions, the expected net present value of hedging should be POSITIVE.

Assuming no transaction costs (i.e., hedging is "free") , hedging currency exposures should the variability of expected cash flows to a firm and at the same time, the expected value of the cash flows should .

Which of the following is NOT cited as a good reason for hedging currency exposures?

________ exposure is the potential for accounting-derived changes in owner's equity to occur because of the need to translate foreign currency financial statements into a single reporting currency.

Shareholders are LESS capable of diversifying currency risk than is the management of the firm.

Management often conducts hedging activities that benefit management at the expense of the shareholders. The field of finance called agency theory frequently argues that management is generally LESS risk averse than are shareholders.

Transaction exposure and operating exposure exist because of unexpected changes in future cash flows. The difference between the two is that exposure deals with cash flows already contracted for, while exposure deals with future cash flows that might change because of changes in exchange rates.

Losses from exposure generally reduce taxable income in the year they are realized. exposure losses are not cash losses and therefore, are not tax deductible.

The key arguments in opposition to currency hedging such as market efficiency, agency theory, and diversification do not have financial theory at their core.

Losses from exposure generally reduce taxable income in the year they are realized. exposure losses may reduce taxes over a series of years.

Quiz 10: Transaction Exposure

________ exposure deals with cash flows that result from existing contractual obligations.

Hedging, or reducing risk, is the same as adding value or return to the firm.

Each of the following is another name for operating exposure EXCEPT:

MNE cash flows may be sensitive to changes in which of the following?

A ________ hedge refers to an offsetting operating cash flow such as a payable arising from the conduct of business.

As a generalized rule, only realized foreign exchange losses are deductible for tax purposes.

Which of the following is cited as a good reason for NOT hedging currency exposures?

Many MNE s manage foreign exchange exposure centrally, thus gains or losses are always matched with the country of origin.

There is considerable question among investors and managers about whether hedging is a good and necessary tool.

________ exposure measures the change in the present value of the firm resulting from unexpected changes in exchange rates.

Managers CAN outguess the market. If and when markets are in equilibrium with respect to parity conditions, the expected net present value of hedging should be POSITIVE.

Assuming no transaction costs (i.e., hedging is "free") , hedging currency exposures should ________ the variability of expected cash flows to a firm and at the same time, the expected value of the cash flows should ________.

Which of the following is NOT cited as a good reason for hedging currency exposures?

________ exposure is the potential for accounting-derived changes in owner's equity to occur because of the need to translate foreign currency financial statements into a single reporting currency.

Shareholders are LESS capable of diversifying currency risk than is the management of the firm.

Management often conducts hedging activities that benefit management at the expense of the shareholders. The field of finance called agency theory frequently argues that management is generally LESS risk averse than are shareholders.

Losses from ________ exposure generally reduce taxable income in the year they are realized. ________ exposure losses are not cash losses and therefore, are not tax deductible.

The key arguments in opposition to currency hedging such as market efficiency, agency theory, and diversification do not have financial theory at their core.

Losses from ________ exposure generally reduce taxable income in the year they are realized. ________ exposure losses may reduce taxes over a series of years.

Assuming no transaction costs (i.e., hedging is "free") , hedging currency exposures should the variability of expected cash flows to a firm and at the same time, the expected value of the cash flows should .

Losses from exposure generally reduce taxable income in the year they are realized. exposure losses are not cash losses and therefore, are not tax deductible.

Losses from exposure generally reduce taxable income in the year they are realized. exposure losses may reduce taxes over a series of years.