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Student: ___________________________________________________________________________
1.
Suppose the U.S. dollar substantially depreciates against the Japanese yen. The change in exchange
rate
A. can have significant economic consequences for U.S. firms.
B. can have significant economic consequences for Japanese firms.
C. can have significant economic consequences for both U.S. and Japanese firms.
D. none of the above
2.
Suppose the U.S. dollar substantially depreciates against the Japanese yen. The change in exchange
rate
A. will tend to weaken the competitive position of import-competing U.S. car makers.
B. will tend to strengthen the competitive position of import-competing U.S. car makers.
C. will tend to strengthen the competitive position of Japanese car makers at the expense of U.S. makers.
D. none of the above
3.
The link between a firm's future operating cash flows and exchange rate fluctuations is
A. asset exposure.
B. operating exposure.
C. both a and b
D. none of the above
4.
5.
6.
7.
Two studies found a link between exchange rates and the stock prices of U.S. firms,
A.this suggests that exchange rate changes can systematically affect the value of the firm by influencing
its operating cash flows.
B this suggests that exchange rate changes can systematically affect the value of the firm by influencing
. the domestic currency values of its assets and liabilities.
C. both a and b
D. none of the above
8.
9.
is given by:
15.
The exposure coefficient
in the regression
is:
A. A measure of how a change in the exchange rate affects the dollar value of a firm's assets.
B. Has a value of zero if the value of the firm's assets is perfectly correlated with changes in the exchange
rate.
C. both a and b
D. none of the above
16.
The exposure coefficient
in the regression
informs
A. how much of a foreign currency to sell forward.
B. the part of the variability of the dollar value of the asset that is related to random changes in the
exchange rate.
C. captures the residual part of the dollar value variability that is independent of exchange rate
movements.
D. how many call options to write.
17. Before you can use the hedging strategies such as a forward market hedge, options market hedge, and so
on, you should consider running a regression of the form
. When reviewing the output,
you should initially focus on
A. the intercept a.
B. the slope coefficient b.
C. mean square error, MSE.
D. R2.
18. The link between the home currency value of a firm's assets and liabilities and exchange rate fluctuations
is
A. asset exposure.
B. operating exposure.
C. both a and b
D. none of the above
19. A purely domestic firm that sources and sells only domestically,
A. faces exchange rate risk to the extent that it has international competitors in the domestic market.
B. faces no exchange rate risk.
C. should never hedge since this could actually increase its currency exposure.
D. both b and c
20. In recent years, the U.S. dollar has depreciated substantially against most major currencies of the world,
especially against the euro.
A The stronger euro has made many European products more expensive in dollar terms, hurting sales of
. these products in the United States.
B. The stronger euro has made many American products less expensive in euro terms, boosting sales of
U.S. products in Europe.
C. Both a and b
D. None of the above
21. In recent years,
A. the U.S. dollar has appreciated substantially against most major currencies of the world, especially
against the euro.
B. the U.S. dollar has depreciated substantially against most major currencies of the world, especially
against the euro.
C. the U.S. dollar has maintained its value against most major currencies of the world, especially against
the euro.
22. From the perspective of the U.S. firm that owns an asset in Britain, the exposure that can be measured by
the coefficient b in regressing the dollar value P of the British asset on the dollar/pound exchange rate S
using the regression equation
is
A. asset exposure.
B. operating exposure.
C. accounting exposure.
D. none of the above
23. On the basis of regression Equation
we can decompose the variability of the dollar
value of the asset, Var(P), into two separate components.
A. Cov(P,S) = b2 Var(P) + Var(S)
B. Var(P) = b2 Var(S) + Var(e)
C. Cov(P,S) = b2 Cov(S,P) + Cov(S,e)
D. Var(P) = b2 Var(S)
E. None of the above
24. On the basis of regression Equation
we can decompose the variability of the dollar
value of the asset, Var(P), into two separate components Var(P) = b2 Var(S) + Var(e).
The first term in the right-hand side of the equation, b2 Var(S) represents.
A. the part of the variability of the dollar value of the asset that is related to random changes in the
exchange rate.
B. captures the residual part of the dollar value variability that is independent of exchange rate
movements.
C. none of the above
25. On the basis of regression Equation
we can decompose the variability of the dollar
value of the asset, Var(P), into two separate components Var(P) = b2 Var(S) + Var(e).
The second term in the right-hand side of the equation, Var(e) represents.
A. the part of the variability of the dollar value of the asset that is related to random changes in the
exchange rate.
B. captures the residual part of the dollar value variability that is independent of exchange rate
movements.
C. none of the above
26. What does it mean to have redenominated an asset in terms of the dollar?
A. You have undertaken a hedging strategy that gives the asset a constant dollar value.
B. Multiply the foreign currency value of the asset by the spot exchange rate.
C. Undertaken accounting changes to eliminate translation exposure.
D. None of the above
27. A firm with a highly elastic demand for its products
A will be unable to pass increased costs following unfavorable changes in the exchange rate without
. significantly lowering the quantity sold.
B. will be able to raise prices following unfavorable changes in the exchange rate without significantly
lowering the quantity sold.
C. can easily pass increased costs on to consumers.
D. will sell about the same amount of product regardless of price.
28. Operating exposure can be defined as
A. the link between the future home currency values of the firm's assets and liabilities and exchange rate
fluctuations.
B. the extent to which the firm's operating cash flows would be affected by random changes in exchange
rates.
C the sensitivity of realized domestic currency values of the firm's contractual cash flows denominated in
. foreign currencies to unexpected exchange rate changes.
D. the potential that the firm's consolidated financial statement can be affected by changes in exchange
rates.
29. The extent to which the firm's operating cash flows would be affected by random changes in exchange
rates is called
A. asset exposure.
B. operating exposure.
C. both a and b
D. none of the above
30. The variability of the dollar value of an asset (invested overseas) depends on
A. the variability of the dollar value of the asset that is related to random changes in the exchange rate.
B. the dollar value variability that is independent of exchange rate movements.
C. both a and b
D. none of the above
31. Consider a U.S. MNC who owns a foreign asset. If the foreign currency value of the asset is inversely
related to changes in the dollar-foreign currency exchange rate,
A. the company has a built-in hedge.
B. the dollar value variability that is independent of exchange rate movements.
C. both a and b
D. none of the above
32. With regard to operational hedging versus financial hedging,
A. operational hedging provides a more stable long-term approach than does financial hedging.
B. financial hedging, when instituted on a rollover basis, is a superior long-term approach to operational
hedging.
C. since they both have the same goal, stabilizing the firm's cash flows in domestic currency, they are
fungible in use.
D. none of the above
33. Which of the following are identified by your text as a strategy for managing operating exposure:
1) Selecting low-cost production sites
2) Flexible sourcing policy
3) Diversification of the market
4) Product differentiation and R&D efforts
5) Financial Hedging
A. 1), 3), and 5) only
B. 2) and 4) only
C. 1), 4), and 5) only
D. 1), 2), 3), 4), and 5)
A U.S. firm holds an asset in Great Britain and faces the following scenario:
where,
P* = Pound sterling price of the asset held by the U.S. firm
P = Dollar price of the same asset
34. The expected value of the investment in U.S. dollars is
A. $4,950.
B. $3,700.
C. $2,112.50.
D. none of the above
A.
B.
C.
D.
-25,000
2,5000
-2,500
none of the above
where,
P* = Pound sterling price of the asset held by the U.S. firm
P = Dollar price of the same asset
39. The expected value of the investment in U.S. dollars is:
A. $5,050
B. $3,700
C. $2,112.50
D. none of the above
40. The variance of the exchange rate is:
A. 0.0200
B. 0.10
C. 0.002
D. none of the above
A.
B.
C.
D.
7,500
2,5000
-2,500
none of the above
where,
P* = Pound sterling price of the asset held by the U.S. firm
P = Dollar price of the same asset
44. The expected value of the investment in U.S. dollars is:
A. $5,050
B. $4,500
C. $2,112.50
D. none of the above
45. The variance of the exchange rate is:
A. 0.0200
B. 0.101875
C. 0.002
D. none of the above
46. The "exposure" (i.e. the regression coefficient beta) is:
A.
B.
C.
D.
7,500
2,5000
-2,500
none of the above
where,
P* = Israeli shekel (IS) price of the asset held by the U.S. firm
P = Dollar price of the same asset
49. The expected value of the investment in U.S. dollars is:
A. $2,083.33
B. $762.50
C. $6,250.00
D. $6,562.50
50. The variance of the exchange rate is:
A. 0.001968
B. 0.002969
C. 0.003968
D. 0.004968
51. The "exposure" (i.e. the regression coefficient beta) is:
A.
B.
C.
D.
-52.6316
1,289.80
12,898.00
none of the above
56. A U.S. firm holds an asset in Great Britain and faces the following scenario:
Where
P* = Pound sterling price of the asset held by the U.S. firm
The CFO decides to hedge his exposure by selling forward the expected value of the pound denominated
cash flow at F1($/) = $2/. As a result
A. The firm's exposure to the exchange rate is made worse.
B. He has a nearly perfect hedge.
C. He has a perfect hedge.
D. None of the above
57. A U.S. firm holds an asset in Italy and faces the following scenario:
Where
P* = Euro price of the asset held by the U.S. firm
The CFO decides to hedge his exposure by selling forward the expected value of the euro denominated
cash flow at F1($/) = $1.50/. As a result
A. the firm's exposure to the exchange rate is made worse.
B. he has a nearly perfect hedge.
C. he has a perfect hedge.
D. none of the above
58. Suppose a U.S. firm has an asset in Britain whose local currency price is random. For simplicity, suppose
there are only three states of the world and each state is equally likely to occur. The future local currency
price of this British asset (P*) as well as the future exchange rate (S) will be determined, depending on
the realized state of the world.
59. Suppose a U.S. firm has an asset in Britain whose local currency price is random. For simplicity, suppose
there are only three states of the world and each state is equally likely to occur. The future local currency
price of this British asset (P*) as well as the future exchange rate (S) will be determined, depending on
the realized state of the world.
Assume that you choose to "hedge" this asset by selling forward the expected value of the euro
denominated cash flow at F1($/) = $1.50/. Calculate your cash flows in each of the possible states.
A. $1,400, $1,400, $1,400
B. $1,496.6, $1,400, $1,306.40
C. $1,404, $1,404. $1,404
D. None of the above
62. Consider a U.S.-based MNC with a wholly-owned Italian subsidiary. Following a depreciation of the
dollar against the euro, which of the following conclusions are correct?
A. The cash flow in euro could be altered due an alteration in the firm's competitive position in the
marketplace.
B. A given operating cash flow in euro will be converted to a higher U.S. dollar cash flow.
C. Both a and b
D. None of the above
63. Consider a U.S.-based MNC with a wholly-owned Italian subsidiary. Following a depreciation of the
dollar against the euro, which of the following describes the competitive effect of the depreciation?
A. The cash flow in euro could be altered due an alteration in the firm's competitive position in the
marketplace.
B. A given operating cash flow in euro will be translated to a higher U.S. dollar cash flow.
C. Both a and b
D. None of the above
64. Consider a U.S. MNC with operations in Great Britain. Which of the following are potential risks
following a strengthening of the dollar?
A A pound sterling depreciation may affect operating cash flow in pounds by altering the firm's
. competitive position in the marketplace.
B. A given operating cash flow in pounds will be converted into a lower dollar amount after the pound
depreciation.
C. Both a and b
D. None of the above
65. Which of the following is false?
A The competitive effect is that a depreciation may affect operating cash flow in the foreign currency by
. altering the firm's competitive position in the marketplace.
B The conversion effect is defined as a given operating cash flow in a foreign currency will be converted
. into a lower dollar amount after a currency depreciation.
C The competitive effect is defined as a given operating cash flow in a foreign currency will be converted
. into a lower dollar amount after a currency depreciation.
D. None of the above
66. Consider a U.S.-based MNC with a wholly-owned German subsidiary. Following a depreciation of the
dollar against the euro, which of the following describes the conversion effect of the depreciation?
A. The cash flow in euro could be altered due a change in the firm's competitive position in the
marketplace.
B. A given operating cash flow in euro will be translated to a higher U.S. dollar cash flow.
C. Both a and b
D. None of the above
67. Consider a U.S.-based MNC with a wholly-owned French subsidiary. Following a depreciation of
the dollar against the euro, which of the following best describes the mechanism of any effect of the
depreciation?
AThe change in the cash flow in euro due an alteration in the firm's competitive position in the
. marketplace is in part a function of the elasticity of demand for the firm's product.
B.A given operating cash flow in euro will be translated to a higher U.S. dollar cash flow regardless of
the firm's hedging program.
C. Both a and b
D. None of the above
76. Generally speaking, a firm is subject to high degrees of operating exposure when
A. either its cost or its price is sensitive to exchange rate changes.
B. both the cost and the price are sensitive to exchange rate changes.
C. both the cost and the price are insensitive to exchange rate changes.
D. none of the above
77. What is the objective of managing operating exposure?
A. Stabilize cash flows in the face of fluctuating exchange rates.
B. Selecting low cost production sites.
C. Increase the variability of cash flows in the face of fluctuating exchange rates.
D. Both a and c
78. What is the objective of managing operating exposure?
A. Stabilize accounting results in the face of fluctuating exchange rates.
B. Selecting low cost production sites.
C. Increase the variability of cash flows in the face of fluctuating exchange rates.
D. None of the above
79. Managing operating exposure
A. is a short-term tactical issue.
B. is a long-term issue, like selecting a site for a factory.
C. is relatively unimportant, since most MNCs have a built-in hedge.
D. none of the above
80. Which of the following can a company use to manage operating exposure?
A. Selecting low-cost production sites, diversifying the market.
B. Low cost production sites, but not financial hedging.
C. Pursuing a flexible sourcing policy, product differentiation, R&D efforts.
D. Both a and c.
81. When the domestic currency is strong or expected to become strong,
A. this could erode the competitive position of the firm's exports.
B. this could erode the competitive position of the firm's import competition.
C. the firm should consider locating production facilities in a foreign country where costs are low.
D. both a and c
82. A foreign country could provide low cost production sites
A. because the factors of production are underpriced.
B. because the currency is undervalued.
C. because the locals like to give away their land labor and capital to foreigners.
D. both a and b
83. While maintaining multiple production sites does provide a firm valuable options,
A. a firm may miss out on economies of scope.
B. a firm may miss out on economies of scale.
C. a firm may find that exchange rate changes can fully offset the advantage of multiple manufacturing
sites.
D. both a and b
84. Goldman Sachs estimates that as much as __% of the pretax profits that Porsche reported for a recent
fiscal year came from skillfully executing currency options.
A. 5
B. 10
C. 15
D. 75
A.
B.
C.
D.
unhedged, hedged.
hedged, unhedged.
normal, abnormal.
none of the above
96. Investment in R&D activities can allow the firm to maintain and strengthen its competitive position in the
face of adverse exchange rate movements. The mechanism for this includes
A. successful R&D efforts allow the firm to cut costs and enhance productivity.
BR&D efforts can lead to the introduction of new and unique products for which competitors offer no
. close substitutessince the demand for unique products tends to be highly inelastic the firm would be
less exposed to exchange risk.
Csuccessful R&D efforts can create a perception among consumers that its product is indeed different
. from those offered by competitors. Once the firm's product acquires a unique identity, its demand is less
likely to be price-sensitive.
D. all of the above
97. If the stock market of a foreign country is consistently up when the dollar value of the currency is
down,
A. there may not be a great deal of exchange rate risk for a U.S.-based investor.
B. there will be a great deal of exchange rate risk for a U.S.-based investor.
C. then investors can ignore diversification.
D. none of the above
Suppose that you hold a piece of land in the city of London that you may want to sell in one year. As a
U.S. resident, you are concerned with the dollar value of the land. Assume that if the British economy
booms in the future, the land will be worth 2,000, and one British pound will be worth $1.80. If the
British economy slows down, on the other hand, the land will be worth less, say, 1,500, but the pound
will be stronger, say, $2.20/. You feel that the British economy will experience a boom with a 60
percent probability and a slowdown with a 40 percent probability.
99. Compute the variance of the dollar value of your property that is attributable to exchange rate
uncertainty.
100.Discuss how you can hedge your exchange risk exposure and also examine the consequences of
hedging.
9 Key
1.
Suppose the U.S. dollar substantially depreciates against the Japanese yen. The change in exchange
rate
A. can have significant economic consequences for U.S. firms.
B. can have significant economic consequences for Japanese firms.
C. can have significant economic consequences for both U.S. and Japanese firms.
D. none of the above
Eun - Chapter 09 #1
Topic: How to Measure Economic Exposure
2.
Suppose the U.S. dollar substantially depreciates against the Japanese yen. The change in exchange
rate
A. will tend to weaken the competitive position of import-competing U.S. car makers.
B. will tend to strengthen the competitive position of import-competing U.S. car makers.
C. will tend to strengthen the competitive position of Japanese car makers at the expense of U.S.
makers.
D. none of the above
Eun - Chapter 09 #2
Topic: How to Measure Economic Exposure
3.
The link between a firm's future operating cash flows and exchange rate fluctuations is
A. asset exposure.
B. operating exposure.
C. both a and b
D. none of the above
Eun - Chapter 09 #3
Topic: How to Measure Economic Exposure
4.
5.
6.
7.
Two studies found a link between exchange rates and the stock prices of U.S. firms,
A. this suggests that exchange rate changes can systematically affect the value of the firm by
influencing its operating cash flows.
B this suggests that exchange rate changes can systematically affect the value of the firm by
. influencing the domestic currency values of its assets and liabilities.
C. both a and b
D. none of the above
Eun - Chapter 09 #7
Topic: How to Measure Economic Exposure
8.
9.
10.
11.
12.
Currency risk
A. is the same as currency exposure.
B. represents random changes in exchange rates.
C. measure "what the firm has at risk."
D. both a and b
Eun - Chapter 09 #12
Topic: How to Measure Economic Exposure
13.
Suppose a U.S.-based MNC maintains a vacation home for employees in the British countryside and
the local price of this property is always moving together with the pound price of the U.S. dollar. As a
result,
A. whenever the pound depreciates against the dollar, the local currency price of this property goes up
by the same proportion.
B. the firm is not exposed to currency risk even if the pound-dollar exchange rate fluctuates randomly.
C. both a and b
D. none of the above
Eun - Chapter 09 #13
Topic: How to Measure Economic Exposure
14.
is given by:
B.
C.
Eun - Chapter 09 #14
Topic: How to Measure Economic Exposure
15.
The exposure coefficient
in the regression
is:
A. A measure of how a change in the exchange rate affects the dollar value of a firm's assets.
B. Has a value of zero if the value of the firm's assets is perfectly correlated with changes in the
exchange rate.
C. both a and b
D. none of the above
Eun - Chapter 09 #15
Topic: How to Measure Economic Exposure
16.
The exposure coefficient
in the regression
informs
A. how much of a foreign currency to sell forward.
B. the part of the variability of the dollar value of the asset that is related to random changes in the
exchange rate.
C. captures the residual part of the dollar value variability that is independent of exchange rate
movements.
D. how many call options to write.
Eun - Chapter 09 #16
Topic: How to Measure Economic Exposure
17.
Before you can use the hedging strategies such as a forward market hedge, options market hedge, and
so on, you should consider running a regression of the form
. When reviewing the
output, you should initially focus on
A. the intercept a.
B. the slope coefficient b.
C. mean square error, MSE.
D. R2.
Eun - Chapter 09 #17
Topic: How to Measure Economic Exposure
18.
The link between the home currency value of a firm's assets and liabilities and exchange rate
fluctuations is
A. asset exposure.
B. operating exposure.
C. both a and b
D. none of the above
Eun - Chapter 09 #18
Topic: How to Measure Economic Exposure
19.
20.
In recent years, the U.S. dollar has depreciated substantially against most major currencies of the
world, especially against the euro.
A The stronger euro has made many European products more expensive in dollar terms, hurting sales
. of these products in the United States.
B. The stronger euro has made many American products less expensive in euro terms, boosting sales
of U.S. products in Europe.
C. Both a and b
D. None of the above
Eun - Chapter 09 #20
Topic: How to Measure Economic Exposure
21.
In recent years,
A. the U.S. dollar has appreciated substantially against most major currencies of the world, especially
against the euro.
B. the U.S. dollar has depreciated substantially against most major currencies of the world, especially
against the euro.
C. the U.S. dollar has maintained its value against most major currencies of the world, especially
against the euro.
Eun - Chapter 09 #21
Topic: How to Measure Economic Exposure
22.
From the perspective of the U.S. firm that owns an asset in Britain, the exposure that can be measured
by the coefficient b in regressing the dollar value P of the British asset on the dollar/pound exchange
rate S using the regression equation
is
A. asset exposure.
B. operating exposure.
C. accounting exposure.
D. none of the above
Eun - Chapter 09 #22
Topic: How to Measure Economic Exposure
23.
24.
25.
26.
27.
28.
29.
The extent to which the firm's operating cash flows would be affected by random changes in exchange
rates is called
A. asset exposure.
B. operating exposure.
C. both a and b
D. none of the above
Eun - Chapter 09 #29
Topic: Operating Exposure: Definition
30.
31.
Consider a U.S. MNC who owns a foreign asset. If the foreign currency value of the asset is inversely
related to changes in the dollar-foreign currency exchange rate,
A. the company has a built-in hedge.
B. the dollar value variability that is independent of exchange rate movements.
C. both a and b
D. none of the above
Eun - Chapter 09 #31
Topic: Operating Exposure: Definition
32.
33.
Which of the following are identified by your text as a strategy for managing operating exposure:
1) Selecting low-cost production sites
2) Flexible sourcing policy
3) Diversification of the market
4) Product differentiation and R&D efforts
5) Financial Hedging
A. 1), 3), and 5) only
B. 2) and 4) only
C. 1), 4), and 5) only
D. 1), 2), 3), 4), and 5)
Eun - Chapter 09 #33
Topic: Operating Exposure: Definition
A U.S. firm holds an asset in Great Britain and faces the following scenario:
where,
P* = Pound sterling price of the asset held by the U.S. firm
P = Dollar price of the same asset
Eun - Chapter 09
34.
35.
36.
A.
B.
C.
D.
-25,000
2,5000
-2,500
none of the above
Eun - Chapter 09 #36
Topic: Operating Exposure: Definition
37.
38.
A U.S. firm holds an asset in Great Britain and faces the following scenario:
where,
P* = Pound sterling price of the asset held by the U.S. firm
P = Dollar price of the same asset
Eun - Chapter 09
39.
40.
41.
A.
B.
C.
D.
7,500
2,5000
-2,500
none of the above
Eun - Chapter 09 #41
Topic: Operating Exposure: Definition
42.
43.
A U.S. firm holds an asset in Great Britain and faces the following scenario:
where,
P* = Pound sterling price of the asset held by the U.S. firm
P = Dollar price of the same asset
Eun - Chapter 09
44.
45.
46.
A.
B.
C.
D.
7,500
2,5000
-2,500
none of the above
Eun - Chapter 09 #46
Topic: Operating Exposure: Definition
47.
48.
A U.S. firm holds an asset in Israel and faces the following scenario:
where,
P* = Israeli shekel (IS) price of the asset held by the U.S. firm
P = Dollar price of the same asset
Eun - Chapter 09
49.
50.
51.
A.
B.
C.
D.
-52.6316
1,289.80
12,898.00
none of the above
Eun - Chapter 09 #51
Topic: Operating Exposure: Definition
52.
53.
54.
Find an effective hedge financial hedge if a U.S. firm holds an asset in Great Britain and faces the
following scenario:
55.
Suppose that you implement your hedge from the last question at F1($/) = $2/. Your cash flows in
state 1, 2, and 3 respectively will be
A. $5,100, $5,000, $5,100.
B. $5,100, $5,100, $5,100.
C. $5,000, $5,000, $5,000.
D. none of the above
Eun - Chapter 09 #55
Topic: Operating Exposure: Definition
56.
A U.S. firm holds an asset in Great Britain and faces the following scenario:
Where
P* = Pound sterling price of the asset held by the U.S. firm
The CFO decides to hedge his exposure by selling forward the expected value of the pound
denominated cash flow at F1($/) = $2/. As a result
A. The firm's exposure to the exchange rate is made worse.
B. He has a nearly perfect hedge.
C. He has a perfect hedge.
D. None of the above
Eun - Chapter 09 #56
Topic: Operating Exposure: Definition
57.
A U.S. firm holds an asset in Italy and faces the following scenario:
Where
P* = Euro price of the asset held by the U.S. firm
The CFO decides to hedge his exposure by selling forward the expected value of the euro
denominated cash flow at F1($/) = $1.50/. As a result
A. the firm's exposure to the exchange rate is made worse.
B. he has a nearly perfect hedge.
C. he has a perfect hedge.
D. none of the above
Eun - Chapter 09 #57
Topic: Operating Exposure: Definition
58.
Suppose a U.S. firm has an asset in Britain whose local currency price is random. For simplicity,
suppose there are only three states of the world and each state is equally likely to occur. The
future local currency price of this British asset (P*) as well as the future exchange rate (S) will be
determined, depending on the realized state of the world.
59.
Suppose a U.S. firm has an asset in Britain whose local currency price is random. For simplicity,
suppose there are only three states of the world and each state is equally likely to occur. The
future local currency price of this British asset (P*) as well as the future exchange rate (S) will be
determined, depending on the realized state of the world.
60.
Suppose a U.S. firm has an asset in Britain whose local currency price is random. For simplicity,
suppose there are only three states of the world and each state is equally likely to occur. The
future local currency price of this British asset (P*) as well as the future exchange rate (S) will be
determined, depending on the realized state of the world.
61.
Suppose a U.S. firm has an asset in Italy whose local currency price is random. For simplicity,
suppose there are only three states of the world and each state is equally likely to occur. The future
local currency price of this asset (P*) as well as the future exchange rate (S) will be determined,
depending on the realized state of the world.
Assume that you choose to "hedge" this asset by selling forward the expected value of the euro
denominated cash flow at F1($/) = $1.50/. Calculate your cash flows in each of the possible
states.
A. $1,400, $1,400, $1,400
B. $1,496.6, $1,400, $1,306.40
C. $1,404, $1,404. $1,404
D. None of the above
Eun - Chapter 09 #61
Topic: Operating Exposure: Definition
62.
Consider a U.S.-based MNC with a wholly-owned Italian subsidiary. Following a depreciation of the
dollar against the euro, which of the following conclusions are correct?
A. The cash flow in euro could be altered due an alteration in the firm's competitive position in the
marketplace.
B. A given operating cash flow in euro will be converted to a higher U.S. dollar cash flow.
C. Both a and b
D. None of the above
Eun - Chapter 09 #62
Topic: Illustration of Operating Exposure
63.
Consider a U.S.-based MNC with a wholly-owned Italian subsidiary. Following a depreciation of the
dollar against the euro, which of the following describes the competitive effect of the depreciation?
A. The cash flow in euro could be altered due an alteration in the firm's competitive position in the
marketplace.
B. A given operating cash flow in euro will be translated to a higher U.S. dollar cash flow.
C. Both a and b
D. None of the above
Eun - Chapter 09 #63
Topic: Illustration of Operating Exposure
64.
Consider a U.S. MNC with operations in Great Britain. Which of the following are potential risks
following a strengthening of the dollar?
A A pound sterling depreciation may affect operating cash flow in pounds by altering the firm's
. competitive position in the marketplace.
B. A given operating cash flow in pounds will be converted into a lower dollar amount after the pound
depreciation.
C. Both a and b
D. None of the above
Eun - Chapter 09 #64
Topic: Illustration of Operating Exposure
65.
66.
Consider a U.S.-based MNC with a wholly-owned German subsidiary. Following a depreciation of the
dollar against the euro, which of the following describes the conversion effect of the depreciation?
A. The cash flow in euro could be altered due a change in the firm's competitive position in the
marketplace.
B. A given operating cash flow in euro will be translated to a higher U.S. dollar cash flow.
C. Both a and b
D. None of the above
Eun - Chapter 09 #66
Topic: Illustration of Operating Exposure
67.
68.
69.
Consider a U.S.-based MNC with a wholly-owned European subsidiary selling a product sourced in
euro and priced in euro with inelastic demand. Following a depreciation of the dollar against the euro,
which of the following is the most true?
A. Since they have inelastic demand, the U.S. firm can just pass through the impact of the exchange
rate change.
B. Since they have elastic demand, the U.S. firm cannot just pass through the impact of the exchange
rate change.
C. Since the exchange rate movement was favorable to the U.S. firm, there is no impact on the firm's
position.
D. None of the above.
Eun - Chapter 09 #69
Topic: Determinants of Operating Exposure
70.
71.
72.
Generally speaking, when both a firm's costs and its price is sensitive to exchange rate changes
A. the firm is not subject to high degrees of operating exposure.
B. the firm is subject to high degrees of operating exposure.
C. the firm should hedge.
D. none of the above
Eun - Chapter 09 #72
Topic: Determinants of Operating Exposure
73.
74.
The firm may not be able to pass through changes in the exchange rate
A. in markets with low product differentiation.
B. in markets with high price elasticities.
C. both a and b
D. none of the above
Eun - Chapter 09 #74
Topic: Determinants of Operating Exposure
75.
The firm may not be able to pass through changes in the exchange rate
A. in markets with mainly domestics (foreign to the firm) competitors.
B. in markets with low price elasticities.
C. both a and b
D. none of the above
Eun - Chapter 09 #75
Topic: Determinants of Operating Exposure
76.
77.
78.
79.
80.
81.
82.
83.
While maintaining multiple production sites does provide a firm valuable options,
A. a firm may miss out on economies of scope.
B. a firm may miss out on economies of scale.
C. a firm may find that exchange rate changes can fully offset the advantage of multiple
manufacturing sites.
D. both a and b
Eun - Chapter 09 #83
Topic: Selecting Low-Cost Production Sites
84.
Goldman Sachs estimates that as much as __% of the pretax profits that Porsche reported for a recent
fiscal year came from skillfully executing currency options.
A. 5
B. 10
C. 15
D. 75
Eun - Chapter 09 #84
Topic: Selecting Low-Cost Production Sites
85.
86.
87.
A firm that is committed to keeping manufacturing facilities in only the home country (and not
developing multiple production sites in a variety of countries) can
A. not mitigate the effects of exchange rate changes.
B. lessen the effect of exchange rate changes by sourcing from where input costs are low.
C. focus on selling commodity products with product differentiation.
D. pursue a strategy of increasing its products price elasticity of demand.
Eun - Chapter 09 #87
Topic: Flexible Sourcing Policy
88.
89.
90.
A firm that is committed to keeping manufacturing facilities in only the home country (and not
developing multiple production sites in a variety of countries) can
A.lessen the effect of exchange rate changes by pursuing a strategy of diversifying the markets in
which the firm's products are sold.
B. not mitigate the effects of exchange rate changes.
C. lessen the effect of exchange rate changes by pursuing a strategy of selling commodity products
without product differentiation.
D. pursue a strategy of increasing its products price elasticity of demand.
Eun - Chapter 09 #90
Topic: Diversification of the Market
91.
It can be argued that, while financial hedging can be used to stabilize a firm's cash flows,
A. it is not a substitute for long-term operational hedging.
B. it is therefore a substitute for long-term operational hedging.
C. it is inferior to money market hedging.
D. none of the above.
Eun - Chapter 09 #91
Topic: Financial Hedging
Topic: R&D Efforts and Product Differentiation
92.
Investments in R&D
A. are usually a waste of time and money.
B. can allow the firm to maintain and strengthen its competitive position.
C. can allow the firm to cut costs and enhance productivity.
D. both b and c
Eun - Chapter 09 #92
Topic: Financial Hedging
Topic: R&D Efforts and Product Differentiation
93.
94.
95.
A.
B.
C.
D.
unhedged, hedged.
hedged, unhedged.
normal, abnormal.
none of the above
Eun - Chapter 09 #95
Topic: Financial Hedging
Topic: R&D Efforts and Product Differentiation
96.
Investment in R&D activities can allow the firm to maintain and strengthen its competitive position in
the face of adverse exchange rate movements. The mechanism for this includes
A. successful R&D efforts allow the firm to cut costs and enhance productivity.
BR&D efforts can lead to the introduction of new and unique products for which competitors offer no
. close substitutessince the demand for unique products tends to be highly inelastic the firm would
be less exposed to exchange risk.
Csuccessful R&D efforts can create a perception among consumers that its product is indeed different
. from those offered by competitors. Once the firm's product acquires a unique identity, its demand is
less likely to be price-sensitive.
D. all of the above
Eun - Chapter 09 #96
Topic: Financial Hedging
Topic: R&D Efforts and Product Differentiation
97.
If the stock market of a foreign country is consistently up when the dollar value of the currency is
down,
A. there may not be a great deal of exchange rate risk for a U.S.-based investor.
B. there will be a great deal of exchange rate risk for a U.S.-based investor.
C. then investors can ignore diversification.
D. none of the above
Eun - Chapter 09 #97
Topic: Financial Hedging
Topic: R&D Efforts and Product Differentiation
Suppose that you hold a piece of land in the city of London that you may want to sell in one year. As a
U.S. resident, you are concerned with the dollar value of the land. Assume that if the British economy
booms in the future, the land will be worth 2,000, and one British pound will be worth $1.80. If
the British economy slows down, on the other hand, the land will be worth less, say, 1,500, but the
pound will be stronger, say, $2.20/. You feel that the British economy will experience a boom with a
60 percent probability and a slowdown with a 40 percent probability.
Eun - Chapter 09