Question 1

If a U.S. firm's cost of goods sold exposure is much greater than its sales exposure in Switzerland, there is a ____ overall impact of the Swiss franc's depreciation against the dollar on ____.

Accepted Answer

When the Swiss franc depreciates against the dollar, the cost of goods sold in Swiss francs decreases more than the sales revenue, leading to an increase in gross profit.

Question 2

According to the text, currency variability levels ____ perfectly stable over time, and currency correlations ____ perfectly stable over time.

Accepted Answer

Currency variability levels and currency correlations are both subject to change due to various economic factors, making them not perfectly stable over time.

Question 3

Generally, MNCs with less foreign costs than foreign revenues will be ____ affected by a ____ foreign currency.

Accepted Answer

When a foreign currency strengthens, MNCs with less foreign costs than foreign revenues benefit because their foreign revenues convert to more of their home currency, increasing profits.

Question 4

Economic exposure can affect:

Accepted Answer

Economic exposure can affect both MNCs and purely domestic firms. Economic exposure arises due to changes in exchange rates, interest rates, inflation rates, and other macroeconomic factors that can affect the value of a firm's assets, liabilities, and cash flows. These factors can impact firms, regardless of their international or domestic operations. A purely domestic firm, for example, can face economic exposure if it borrows money in a foreign currency or competes with foreign firms that benefit from a weaker currency. Similarly, an MNC can face economic exposure in its domestic market if changes in macroeconomic factors affect its profitability, cash flows or the value of its assets and liabilities.

Question 5

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 6

A set of currency cash inflows is more volatile if the correlations are low.

Accepted Answer

The answer of A set of currency cash inflows is...

Question 7

Transaction exposure reflects:

Accepted Answer

Transaction exposure refers to the risk that a company's international contractual transactions will be affected by changes in exchange rates, impacting the value of cash flows from these transactions.

Question 8

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

Accepted Answer

Depreciation of the local currency makes the firm's goods cheaper for foreign buyers, potentially increasing exports. It also makes foreign goods more expensive locally, which could reduce foreign competition. However, it increases the cost of imports and foreign-denominated expenses, contrary to options B, C, and D.

Question 9

Assume that the British pound and Swiss franc are highly correlated. A U.S. firm anticipates the equivalent of $1 million cash outflows in francs and the equivalent of $1 million cash outflows in pounds. During a ____ cycle, the firm is ____ affected by its exposure.

Accepted Answer

During a strong dollar cycle, the U.S. firm benefits because the dollar's strength means it can exchange fewer dollars for the same amount of foreign currency, reducing the cost of its cash outflows in francs and pounds.

Question 10

Economic exposure refers to:

Accepted Answer

Economic exposure refers to the impact of exchange rate fluctuations on a company's cash flows, which can affect its future revenues, expenses, and profitability. This exposure is related to a company's operating performance and reflects the extent to which its cash flows are affected by changes in exchange rates. The other choices are either too narrow or too broad in scope and do not capture the essence of economic exposure.

Question 11

Jacko Co. is a U.S.-based MNC with net cash inflows of euros and net cash inflows of Sunland francs. These two currencies are highly negatively correlated in their movements against the dollar. Kriner Co. is a U.S.-based MNC that has the same exposure as Jacko Co. in these currencies, except that its Sunland francs represent cash outflows. Which firm has a high exposure to exchange rate risk?

Accepted Answer

Kriner Co. has a higher exposure to exchange rate risk as it has the same exposure as Jacko Co. but with Sunland francs representing cash outflows. With the highly negatively correlated movements of the currencies against the dollar, Kriner Co. would face losses when the Sunland franc strengthens against the dollar during cash outflows.

Question 12

Assume that your firm is an importer of Mexican chairs denominated in pesos. Your competition is mainly U.S. producers of chairs. You wish to assess the relationship between the percentage change in its stock price (SPt) and the percentage change in the peso's value relative to the dollar (PESOt). SPt is the dependent variable. You apply the regression model to an earlier subperiod and a more recent subperiod. In the recent subperiod, you increased your importing volume. You should expect that the regression coefficient in the PESOt variable would be ____ in the first subperiod and ____ in the second subperiod.

Accepted Answer

The answer of Assume that your firm is an importer...

Question 13

Magent Co. is a U.S. company that has exposure to the Swiss francs (SF) and Danish kroner (DK). It has net inflows of SF200 million and net outflows of DK500 million. The present exchange rate of the SF is about $.40 while the present exchange rate of the DK is $.10. Magent Co. has not hedged these positions. The SF and DK are highly correlated in their movements against the dollar. If the dollar weakens, then Magent Co. will:

Accepted Answer

Magent Co. will benefit because the dollar value of its net inflow in Swiss francs (SF200 million * $0.40 = $80 million) exceeds the dollar value of its net outflow in Danish kroner (DK500 million * $0.10 = $50 million). If the dollar weakens, the value of the SF inflow increases more than the DK outflow, resulting in a net gain.

Question 14

Under FASB 52:

Accepted Answer

Under FASB 52, translation gains and losses are included in other comprehensive income, which is a component of stockholder's equity. It is not included in the reported net income.

Question 15

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 16

Diz Co. is a U.S.-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 Co. is a U.S.-based MNC that has the same level of net cash flows in these currencies as Diz Co. except that its euros represent net cash outflows. Which firm has a higher exposure to exchange rate risk?

Accepted Answer

Diz Co. has a higher exposure to exchange rate risk because it has net cash inflows in both euros and Swiss francs, which are highly correlated. This means that if the dollar strengthens against these currencies, Diz Co. will receive less in dollar terms, increasing its exchange rate risk. Yanta Co., on the other hand, has net cash outflows in euros, which can offset the risk from its Swiss franc inflows, reducing its overall exposure.

Question 17

Translation exposure reflects:

Accepted Answer

Translation exposure refers to the risk that a company's financial statements, including assets, liabilities, revenues, and expenses, will be affected by exchange rate fluctuations. This type of exposure arises when a company has foreign subsidiaries or operations that report financial results in a foreign currency, which then must be translated back into the parent company's reporting currency. As exchange rates change over time, the reported value of these foreign assets, revenues, and expenses will also change, potentially impacting the company's financial results and overall value.

Question 18

When the dollar strengthens, the reported consolidated earnings of U.S.-based MNCs are ____ affected by translation exposure. When the dollar weakens, the reported consolidated earnings are ____ affected.

Accepted Answer

When the dollar strengthens, foreign earnings translate into fewer dollars, negatively impacting consolidated earnings. Conversely, when the dollar weakens, foreign earnings translate into more dollars, positively impacting consolidated earnings.

Question 19

A U.S. MNC has the equivalent of $1 million cash outflows in each of two highly negatively correlated currencies. During ____ dollar cycles, cash outflows are ____.

Accepted Answer

During weak dollar cycles, the value of the U.S. dollar decreases relative to other currencies. If the MNC has cash outflows in two highly negatively correlated currencies, the impact of the weak dollar on one currency might be offset by the opposite movement in the other currency, leading to somewhat stable cash outflows overall.

Question 20

Which of the following operations benefit(s) from depreciation of the firm's local currency?

Accepted Answer

Investing in foreign bank accounts denominated in foreign currencies prior to depreciation benefits because the value of the foreign currency assets increases relative to the depreciated local currency.

Quiz 10: Measuring Exposure to Exchange Rate Fluctuations

If a U.S. firm's cost of goods sold exposure is much greater than its sales exposure in Switzerland, there is a overall impact of the Swiss franc's depreciation against the dollar on .

According to the text, currency variability levels perfectly stable over time, and currency correlations perfectly stable over time.

Generally, MNCs with less foreign costs than foreign revenues will be affected by a foreign currency.