Question 1

Operating cash flows may occur in different currencies and at different times,but financing cash flows may occur only in a single currency.

Accepted Answer

Both operating and financing cash flows can occur in different currencies and at different times, as companies often operate and finance their activities in multiple countries and currencies.

Question 2

An unexpected change in exchange rates impacts a firm's expected cash flows at three levels,depending on the time horizon used (Short Run,Medium Run,and Long Run).Describe the three operating exposure's phases of adjustment assuming that parity conditions do not hold among foreign exchange rates,national inflation rates,and national interest rates (disequilibrium).

Accepted Answer

The first level impact is on expected cash flows in the one-year operating budget.The gain or loss depends on the currency of denomination of expected cash flows.These are both existing transaction exposures and anticipated exposures.The currency of denomination cannot be changed for existing obligations,or even for implied obligations such as purchase or sales commitments.In the short run it is difficult to change sales prices or renegotiate factor costs.Therefore,realized cash flows will differ from those expected in the budget.
The second level impact is on expected medium-run cash flows assuming disequilibrium conditions.In this case,the firm may not be able to adjust prices and costs to reflect the new competitive realities caused by a change in exchange rates.The primary problem may be the reactions of existing competitors.The firm's realized cash flows will differ from its expected cash flows.The firm's market value may change because of the unanticipated results.
The third level impact is on expected long-run cash flows,meaning those beyond five years.At this strategic level a firm's cash flows will be influenced by the reactions of both existing competitors and potential competitors-possible new entrants-to exchange rate changes under disequilibrium conditions.In fact,all firms that are subject to international competition,whether they are purely domestic or multinational,are exposed to foreign exchange operating exposure in the long run whenever foreign exchange markets are not continuously in equilibrium.

Question 3

Even though contracts are often fixed in the short run,as time passes,prices and costs can be changed to reflect the new competitive realities caused by a change in exchange rates.

Accepted Answer

This statement is true. Changes in exchange rates can lead to changes in prices and costs, which can ultimately affect the terms of a contract over time.

Question 4

The strategy management undertakes in response to unexpected changes in exchange rates depends to a large measure on their opinion about the price elasticity of demand.

Accepted Answer

The price elasticity of demand refers to how sensitive the demand for a product or service is to changes in its price. If management believes that the demand for their product is highly price elastic, meaning that customers are likely to be sensitive to changes in price, they may choose to adjust their pricing strategy in response to changes in exchange rates. On the other hand, if management believes that the demand for their product is relatively inelastic, meaning that customers are less sensitive to changes in price, they may choose to maintain their current pricing strategy and absorb the impact of exchange rate changes on their profit margins. Therefore, their response to unexpected changes in exchange rates would depend heavily on their opinion about the price elasticity of demand.

Question 5

When considering the phases of adjustment and response to operating exposure in the LONG RUN,price changes tend to be ________ and volume changes tend to be ________.
A) fixed/contracted; contracted.
B) fixed/contracted; completely flexible.
C) completely flexible; completely flexible.
D) completely flexible; contracted.

Accepted Answer

In the long run, both price and volume changes tend to be completely flexible as firms adjust their operations, pricing strategies, and market focus to adapt to changes in exchange rates and competitive conditions.

Question 6

Unexpected changes in exchange rates is never good news for a firm's operating income.

Accepted Answer

Unexpected changes in exchange rates can sometimes benefit a firm's operating income if the firm receives revenues in a currency that appreciates or pays expenses in a currency that depreciates, improving profitability.

Question 7

________ exposure is far more important for the long-run health of a business than changes caused by ________ or ________ exposure.
A) Operating; translation; transaction
B) Transaction; operating; translation
C) Accounting; translation; transaction
D) Translation; operating; transaction

Accepted Answer

Operating exposure refers to the risk that a company faces from its ongoing operations, including sales and production. This exposure is more important for the long-term health of a business than changes caused by transaction exposure, which results from fluctuations in currency exchange rates for individual transactions, or translation exposure, which results from the effects of translating international financial statements into a company's domestic currency. In other words, the impact of operating exposure on a business is more significant and lasting, as it affects the overall performance and sustainability of the company, while transaction and translation exposures primarily impact short-term financial results.

Question 8

For a firm that competes internationally to sell its products,a depreciation of its domestic currency relative to markets where the firm exports goods,should eventually result in ________ sales at home and ________ sales abroad,other things equal.
A) fewer; greater
B) fewer; fewer
C) greater; greater
D) greater; fewer

Accepted Answer

The answer of For a firm that competes internationally to...

Question 9

Simpson Sign Company based in Frostbite Falls,Minnesota has a 6-month C$100,000 contract to complete sign work in Winnipeg,Manitoba,Canada.The current spot rate is $1.02/C$ and the forward rate is $1.01/C$.Under conditions of equilibrium,management would use ________ today when preparing operating budgets.
A) $102,000
B) $101,000
C) $100,000
D) none of the above

Accepted Answer

Under conditions of equilibrium and for the purpose of preparing operating budgets for a contract involving foreign currency, management would use the forward rate to hedge against currency fluctuation risk. Since the contract is in Canadian dollars and the forward rate is $1.01/C$, the correct amount in USD to use in the operating budgets would be 100,000 C$ * $1.01/C$ = $101,000.

Question 10

Expected changes in foreign exchange rates should already be factored into anticipated operating results by management and investors.

Accepted Answer

Management and investors should consider the potential impact of foreign exchange rate changes on their operating results and adjust their strategies accordingly to mitigate any potential risks. Ignoring or overlooking these factors could lead to unexpected financial losses.

Question 11

Brimmo Motorcycles Inc.,a U.S.-based firm,manufactures and sells electric motorcycles both domestically and internationally.A sudden and unexpected appreciation of the U.S.dollar should allow sales to ________ at home and ________ abroad.(Assume other factors remain unchanged.)
A) increase; increase
B) decrease; decrease
C) increase; decrease
D) decrease; increase

Accepted Answer

The answer of Brimmo Motorcycles Inc.,a U.S.-based firm,manufactures and sells...

Question 12

The higher the price elasticity of demand,the higher the degree of pass-through.

Accepted Answer

The price elasticity of demand measures how much the quantity demanded of a good responds to a change in the price of that good. A higher price elasticity indicates that consumers are more sensitive to price changes, which often leads to a lower degree of pass-through, as producers cannot easily increase prices without significantly reducing demand.

Question 13

________ cash flows arise from intracompany and intercompany receivables and payments,while ________ cash flows are payments for the use of loans and equity.
A) Financing; operating
B) Operating; financing
C) Operating; accounting
D) Accounting; financing

Accepted Answer

Operating cash flows arise from day-to-day business operations such as the sale of goods or services, while financing cash flows are related to the company's financing activities such as payments for the use of loans and equity. Intracompany and intercompany receivables and payments are considered part of operating cash flows as they are directly related to the company's core business operations.

Question 14

Recently the Canadian dollar realized an unexpected appreciation in value.Which of the following actions being considered by Tall Timber Exports,a Canadian logging firm specializing in exporting raw forest products,would be considered a highly unlikely response to the appreciation of the Canadian dollar?
A) Tall Timber Exports might lower export prices in an effort to maintain market share.
B) Tall Timber Exports might raise export prices only slightly in an effort to increase market share.
C) Tall Timber Exports might leave export prices as they are and wait to determine what actions to take if any in the future.
D) all of the above

Accepted Answer

B is the highly unlikely response as Tall Timber Exports would not raise export prices in an effort to increase market share during a period of unexpected currency appreciation. This would make their exports more expensive and less competitive in the global market. They may choose to lower export prices (A) or leave export prices as they are and wait to determine what actions to take (C).

Question 15

Which of the following is NOT an example of an operating cash flow?
A) management fees and distributed overhead
B) royalties and license fees
C) rent and lease payments
D) dividend paid to parent company

Accepted Answer

Dividend paid to a parent company is a financing cash flow activity, not an operating cash flow activity. Operating cash flow activities involve cash received or paid for the day-to-day operations of the business, such as sales, expenses, and collections on accounts receivable. Management fees, distributed overhead, royalties, license fees, rent, and lease payments are all examples of operating cash flow activities.

Question 16

Recently the British Pound suffered an unexpected depreciation in value.Which of the following actions being considered by Coventry Furniture of London,a purely domestic furniture manufacturer and retailer,would be considered a highly unlikely response to the depreciation of the pound?
A) Coventry might choose to maintain its domestic sales prices constant in pound terms.
B) Coventry might try to raise domestic prices because competing imports are now priced higher in England.
C) Coventry might try to lower domestic prices because competing imports are now priced higher in England.
D) none of the above

Accepted Answer

The answer of Recently the British Pound suffered an unexpected...

Question 17

Another name for operating exposure is ________ exposure.
A) economic
B) competitive
C) strategic
D) all of the above

Accepted Answer

The answer of Another name for operating exposure is ________...

Question 18

Which of the following is NOT an example of a financial cash flow?
A) parent invested equity capital
B) interest on intrafirm lending
C) payment for goods and services
D) intrafirm principal payments

Accepted Answer

Payment for goods and services is not a financial cash flow, but an operating cash flow as it relates to the company's core business activities. The other options involve financial transactions, such as investments, interest, and principal payments.

Question 19

What type of international risk exposure measures the change in present value of a firm resulting from changes in future operating cash flows caused by any unexpected change in exchange rates?
A) transaction exposure
B) accounting exposure
C) operating exposure
D) translation exposure

Accepted Answer

Operating exposure measures the change in present value of a firm resulting from changes in future operating cash flows caused by any unexpected change in exchange rates. Transaction exposure measures the risk of potential loss from a specific transaction due to changes in exchange rates. Accounting exposure measures the impact of exchange rate fluctuations on a firm's financial statements. Translation exposure measures the impact of exchange rate fluctuations on a multinational corporation's financial statements when consolidating foreign subsidiaries.

Question 20

The goal of operating exposure analysis is to identify strategic operating techniques the firm might adopt to enhance value in the face of unanticipated exchange rate changes.

Accepted Answer

The statement accurately describes the goal of operating exposure analysis. By identifying potential strategies to mitigate the negative impact of currency fluctuations, firms can improve their financial performance and create value for shareholders.

Quiz 12: Operating Exposure

Operating cash flows may occur in different currencies and at different times,but financing cash flows may occur only in a single currency.

Even though contracts are often fixed in the short run,as time passes,prices and costs can be changed to reflect the new competitive realities caused by a change in exchange rates.

The strategy management undertakes in response to unexpected changes in exchange rates depends to a large measure on their opinion about the price elasticity of demand.

When considering the phases of adjustment and response to operating exposure in the LONG RUN,price changes tend to be and volume changes tend to be .

Unexpected changes in exchange rates is never good news for a firm's operating income.

exposure is far more important for the long-run health of a business than changes caused by or exposure.

For a firm that competes internationally to sell its products,a depreciation of its domestic currency relative to markets where the firm exports goods,should eventually result in sales at home and sales abroad,other things equal.

Expected changes in foreign exchange rates should already be factored into anticipated operating results by management and investors.

Brimmo Motorcycles Inc.,a U.S.-based firm,manufactures and sells electric motorcycles both domestically and internationally.A sudden and unexpected appreciation of the U.S.dollar should allow sales to at home and abroad.(Assume other factors remain unchanged.)

The higher the price elasticity of demand,the higher the degree of pass-through.

cash flows arise from intracompany and intercompany receivables and payments,while cash flows are payments for the use of loans and equity.

Which of the following is NOT an example of an operating cash flow?

Recently the British Pound suffered an unexpected depreciation in value.Which of the following actions being considered by Coventry Furniture of London,a purely domestic furniture manufacturer and retailer,would be considered a highly unlikely response to the depreciation of the pound?

Another name for operating exposure is ________ exposure.

Which of the following is NOT an example of a financial cash flow?

What type of international risk exposure measures the change in present value of a firm resulting from changes in future operating cash flows caused by any unexpected change in exchange rates?

The goal of operating exposure analysis is to identify strategic operating techniques the firm might adopt to enhance value in the face of unanticipated exchange rate changes.