International Finance Chapter 12

1 Suppose the U.S. dollar substantially depreciates against the Japanese yen. The change in exchange ratea) 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 C
2 Suppose the U.S. dollar substantially depreciates against the Japanese yen. The change in exchange ratea) 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 B
3 The link between a firm’s future operating cash flows and exchange rate fluctuations isa) asset exposureb) operating exposurec) both a) and b)d) none of the above B
4 When the Mexican peso collapsed in 1994, declining by 37 percent,a) U.S. firms that exported to Mexico and priced in peso were adversely affected. b) U.S. firms that exported to Mexico and priced in dollars were adversely affected. c) U.S. firms were unaffected by the peso collapse, since Mexico is such a small market.d) both a) and b) D
5 When exchange rates change,a) U.S. firms that produce domestically and sell only to domestic customers will be unaffected. b) U.S. firms that produce domestically and sell only to domestic customers can be affected if they compete against imports. c) U.S. firms that produce domestically and sell only to domestic customers will be affected, but only if they borrow in foreign currency to finance their domestic operations. d) both a) and b) B
6 When exchange rates change,a) this can alter the operating cash flow of a domestic firm.b) this can alter the competitive position of a domestic firm.c) this can alter the home currency values of a multinational firm’s assets and liabilities.d) all of the above D
7 It is conventional to classify foreign currency exposures into the following types:a) economic exposure, transaction exposure, and translation exposure.b) economic exposure, noneconomic exposure, and political exposure.c) national exposure, international exposure, and trade exposure.d) conversion exposure, and exchange exposure. A
8 Economic exposure refers toa) the sensitivity of realized domestic currency values of the firm’s contractual cash flows denominated in foreign currencies to unexpected exchange rate changes.b) the extent to which the value of the firm would be affected by unanticipated changes in exchange rate.c) the potential that the firm’s consolidated financial statement can be affected by changes in exchange rates.d) ex post and ex ante currency exposures. B
9 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) B
10 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 C
11 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) A
12 If 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 C
13 If 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. B
14 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 A
15 A firm with a highly elastic demand for its productsa) 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. A
16 Operating exposure can be defined asa) 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. B
17 The extent to which the firm’s operating cash flows would be affected by random changes in exchange rates is calleda) asset exposureb) operating exposurec) both a) and b)d) none of the above B
18 The variability of the dollar value of an asset (invested overseas) depends ona) 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 C
19 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 A
20 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.State Probability P S S×P1 ⅓ £980 $1.40/£ $1,3722 ⅓ £1,000 $1.50/£ $1,5003 ⅓ £1,070 $1.60/£ $1,712Which of the following statements is most correct?a) The firm faces no exchange rate risk since the local currency price of the asset and the exchange rate are negatively correlated.b) The firm faces substantial exchange rate risk since the local currency price of the asset and the exchange rate are positively correlated.c) The firm’s exchange rate exposure can be completely hedged with derivatives written on the British pound.d) Since randomness is involved, no hedging is possible. B
21 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.State Probability P S S×P1 ⅓ £1,000 $1.40/£ $1,4002 ⅓ £1,000 $1.50/£ $1,5003 ⅓ £1,000 $1.60/£ $1,600Which of the following statements is most correct?a) The firm faces no exchange rate risk since the local currency price of the asset and the exchange rate are negatively correlated.b) The firm faces substantial exchange rate risk since the local currency price of the asset and the exchange rate are positively correlated.c) The firm’s exchange rate exposure can be completely hedged with derivatives written on the British pound.d) Since randomness is involved, no hedging is possible. C
22 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.State Probability P S S×P1 ⅓ £1,000 $1.40/£ $1,4002 ⅓ £933 $1.50/£ $1,4003 ⅓ £875 $1.60/£ $1,400Which of the following statements is most correct?a) The firm faces no exchange rate risk since the local currency price of the asset and the exchange rate are negatively correlated.b) The firm faces substantial exchange rate risk since the local currency price of the asset and the exchange rate are positively correlated.c) The firm’s exchange rate exposure can be completely hedged with derivatives written on the British pound.d) Since randomness is involved, no hedging is possible. A
23 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 C
24 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 A
25 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 C
26 A firm’s operating exposure isa) defined as the extent to which the firm’s operating cash flows would be affected by the random changes in exchange ratesb) determined by the structure of the markets in which the firm sources its inputs, such as labor and materials, and sells its products.c) determined by the firm’s ability to mitigate the effect of exchange rate changes by adjusting its markets, product mix, and sourcing.d) all of the above D
27 Generally speaking, a firm is subject to high degrees of operating exposurea) when its costs are sensitive to exchange rate changes.b) when its prices are sensitive to exchange rate changes.c) when either its cost or its price is sensitive to exchange rate changes.d) none of the above C
28 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 A
29 Generally speaking, a firm is subject to high degrees of operating exposure whena) 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 A
30 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) A
31 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 D
32 Managing operating exposurea) 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 B
33 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). D
34 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) D
35 A foreign country could provide low cost production sitesa) 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) D
36 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) B
37 Developing multiple production sites in a variety of countries,a) can create an excess capacity problem.b) can lead to underutilization of domestic plants.c) can lead to domestic job losses.d) all of the above D
38 A flexible sourcing policy a) is primarily concerned with low-cost (and often low-quality) vendors.b) need not be confined just to materials and parts. c) only works for manufacturing firms, not service firms.d) puts the focus on the exchange rate at the expense of shipping rates. B
39 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 B
40 If the domestic currency is strong or expected to become strong,a) a firm can choose to locate production facilities in a foreign country where costs are low due to either the undervalued currency or underpriced factors of production.b) a firm should curtail R&D efforts until the exchange rate situation improves.c) a firm should abandon international sales and focus on domestic market share.d) the firm should focus on profiting in the currency futures market based on its forecasts. A
41 Which of the following is a true statement?a) As long as exchange rates do not always move in the same direction, the firm can stabilize its operating cash flows by diversifying its export market.b) The firm should not get into new lines of business solely to diversify exchange risk because conglomerate expansion can bring about inefficiency and losses.c) All of the above are trued) None of the above are true C
42 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. A
43 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. A
44 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) D
45 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 A

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