If Test 3 Ch 9

Front 1

_____ exposure deals with cash flows that result from existing contractual obligations

Back 1

transaction

Front 2

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

Back 2

operating

Front 3

each of the following is another name for operating exposure EXCEPT

Back 3

accounting exposure

Front 4

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

Back 4

transaction, operating

Front 5

______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

Back 5

accounting

Front 6

losses form _____ exposure generally reduce taxable income in the year they are realized. ___ exposure loses may reduce over a series of years

Back 6

transactions, operating

Front 7

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

Back 7

transaction, translation

Front 8

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

Back 8

all of the above

Front 9

company X from USA has localized production near its suppliers in EU and exports its products worldwide. the company

Back 9

has transactional, translational, and operating type of exposure

Front 10

company Y submits 7 day validity offer for spare parts to be exported in Germany starting from january 1st in the following year. by doing so the company has

Back 10

created limited quotation exposure

Front 11

______ is a technique used by MNEs to deal with currency exposure

Back 11

all are techniques MNEs could use

Front 12

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

Back 12

false

Front 13

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 flow should _____

Back 13

decrease, not change

Front 14

which of the following is not cited as a good reason for hedging currency exposures

Back 14

currency risk management increases the expected cash flows to the firm

Front 15

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

Back 15

true

Front 16

which of the following is citied as a good reason for not hedging currency exposures

Back 16

all of the above are cited as reasons not to hedge

Front 17

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

Back 17

false

Front 18

_______Exposure may result form a firm having payable in a foreign currency

Back 18

transaction

Front 19

AU.S. firm sells merchandise today to a British company for £100,000. The current exchange rate is $2.03/£, theaccount is payable in three months, and the firm chooses to avoid any hedgingtechniques designed to reduce or eliminate the risk of changes in the exchangerate. The U.S. firm is at risk today of a loss if

Back 19

all of the above

Front 20

when a firm enters into a 90 day forward exchange contract

Back 20

deliberately creates transaction exposure

Front 21

A U.S. firm sells merchandise today to a Britishcompany for £100,000. The currentexchange rate is $2.03/£, the account is payable in three months, and the firmchooses to avoid any hedging techniques designed to reduce or eliminate therisk of changes in the exchange rate. If the exchange rate changes to $2.05/£the U.S. firm will realize a ________ of ________.

Back 21

gain of $2,000

Front 22

A U.S. firm sells merchandise today to aBritish company for £100,000. Thecurrent exchange rate is $2.03/£, the account is payable in three months, andthe firm chooses to avoid any hedging techniques designed to reduce oreliminate the risk of changes in the exchange rate. If the exchange ratechanges to $2.01/£ the U.S. firm will realize a ________ of ________.

Back 22

loss. $2,000

Front 23

_______ is not a popular contractual hedge against foreign exchange transaction exposure

Back 23

all of the above are contractual hedges

Front 24

Referto Instruction 9.1. If Plains States chooses not to hedge their euroreceivable, the amount they receive in six months will be

Back 24

undeterminable today

Front 25

Refer to Instruction 9.1. If Plains Stateschooses to hedge its transaction exposure in the forward market, it will________ euro 1,250,000 forward at a rate of ________.

Back 25

sell, $1.38/euro

Front 26

Refer to Instruction 9.1. Plains States choosesto hedge its transaction exposure in the forward market at the available forwardrate. The payoff in 6 months will be

Back 26

$1,725,000

Front 27

Referto Instruction 9.1. If Plains States locks in the forward hedge at $1.38/euro,and the spot rate when the transaction was recorded on the books was$1.40/euro, this will result in a "foreign exchange loss" accountingtransaction of

Back 27

$25,000

Front 28

Referto Instruction 9.1. Plains States would be ________ by an amount equal to ________with a forward hedge than if they had not hedged and their predicted exchangerate for 6 months had been correct.

Back 28

worse off, $62,500

Front 29

Referto Instruction 9.1. Plains States could hedge the Euro receivables in the moneymarket. Using the information provided, how much would the money market hedgereturn in six months assuming Plains States reinvests the proceeds at the U.S.investment rate?

Back 29

$1,724,880

Front 30

Referto Instruction 9.1. Money market hedges almost always return more than forwardhedges because of the greater risk involved.

Back 30

false

Front 31

Refer to Instruction 9.1. If Plains Stateschooses to implement a money market hedge for the Euro receivables, how muchmoney will the firm borrow today?

Back 31

euro 1,196,172

Front 32

Refer to Instruction 9.1. A ________ hedgeallows Plains States to enjoy the benefits of a favorable change in exchangerates for their euro receivables contract while protecting the firm fromunfavorable exchange rate changes.

Back 32

put option

Front 33

Refer to Instruction 9.1. What is the cost ofa put option hedge for Plains States' euro receivable contract? (Note:Calculate the cost in future value dollars and assume the firm's cost ofcapital as the appropriate interest rate for calculating future values.)

Back 33

$27,694

Front 34

Referto Instruction 9.1. The cost of a call option to Plains States would be

Back 34

there is not enough information to answer this question

Front 35

Referto Instruction 9.1. If Plains States purchases the put option, and the optionexpires in six months on the same day that Plains States receives the euro1,250,000, the firm will exercise the put at that time if the spot rate is$1.43/euro.

Back 35

false

Front 36

The structure of a money market hedge is similarto a forward hedge. The difference is the cost of the money market hedge isdetermined by the differential interest rates, while the forward hedge is afunction of the forward rates quotation.

Back 36

true

Front 37

In efficient markets, interest rate parityshould assure that the costs of a forward hedge and money market hedge shouldbe approximately the same.

Back 37

true

Front 38

US firm submitted a fixed bid for a Euromultimillion project in Ukraine. The contract will be awarded in 12 months andthe company knows there will be no advance payments. The company

Back 38

should buy 12 months put option and limit the loss to the premium amount if the bid gets rejected

Front 39

German company is evaluating alternatives tohedge US1M payable in three months. A money market hedge for this transactionwill be

Back 39

investing in dollar denominated short term government security yielding .02%

Front 40

USfirm submitted a fixed bid for a Euro multimillion project in Ukraine. Thecontract will be awarded in 12 months and the company knows there will be noadvance payments. The company

Back 40

should buy 12 months put option and limit the loss to the premium amount if the bid gets rejected