Chapter 9: Management of Economic Exposure

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. The cash flow in euro could be altered due an alteration in the firm's competitive position in the marketplace.

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

A. either its cost or its price is sensitive to exchange rate changes.

The price elasticity of demand for commodity products tends to be A. highly elastic. B. highly inelastic. C. both a and b D. none of the above

A. highly elastic.

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

A. in markets with mainly domestics (foreign to the firm) competitors.

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. it is not a substitute for long-term operational hedging.

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. operational hedging provides a more stable long-term approach than does financial hedging.

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. the firm is not subject to high degrees of operating exposure.

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. Stabilize cash flows in the face of fluctuating exchange rates.

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? A. The 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

A. The 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.

Which of the following is true? A. The competitive effect is that a currency 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 accounting cash value in a foreign currency will be converted into a lower dollar amount after 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

A. The competitive effect is that a currency depreciation may affect operating cash flow in the foreign currency by altering the firm's competitive position in the marketplace.

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. You have undertaken a hedging strategy that gives the asset a constant dollar value.

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. 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.

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

A. asset exposure.

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

A. asset exposure.

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. economic exposure, transaction exposure, and translation exposure.

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. faces exchange rate risk to the extent that it has international competitors in the domestic market.

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. lessen the effect of exchange rate changes by pursuing a strategy of diversifying the markets in which the firm's products are sold.

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. there may not be a great deal of exchange rate risk for a U.S.-based investor.

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.

A. will be unable to pass increased costs following unfavorable changes in the exchange rate without significantly lowering the quantity sold.

Which of the following would be an effective hedge? A. Sell 53 Israeli shekels forward at the 1-year forward rate, F1($/IS), that prevails at time zero. B. Buy 53 Israeli shekels forward at the 1-year forward rate, F1($/IS), that prevails at time zero. C. Sell 12,898 Israeli shekels forward at the 1-year forward rate, F1($/IS), that prevails at time zero. D. None of the above

B. Buy 53 Israeli shekels forward at the 1-year forward rate, F1($/IS), that prevails at time zero.

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. a firm may miss out on economies of scale.

The price elasticity of demand for unique products tends to be A. highly elastic. B. highly inelastic. C. both a and b D. none of the above

B. highly inelastic.

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. need not be confined just to materials and parts.

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.

B. the extent to which the firm's operating cash flows would be affected by random changes in exchange rates.

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

B. A given operating cash flow in euro will be translated to a higher U.S. dollar cash flow.

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. U.S. firms that produce domestically and sell only to domestic customers can be affected if they compete against imports.

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

B. is a long-term issue, like selecting a site for a factory.

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. lessen the effect of exchange rate changes by sourcing from where input costs are low.

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

B. operating exposure.

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

B. operating exposure.

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. represents random changes in exchange rates.

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. the U.S. dollar has depreciated substantially against most major currencies of the world, especially against the euro.

Operating exposure measures A. the extent to which the foreign currency value of the firm's assets is affected by unanticipated changes in exchange rates. B. the extent to which the firm's operating cash flows will be affected by unexpected changes in exchange rates. C. the affect of changes in exchange rates will have on the consolidated financial reports of a MNC. D. the affect of unanticipated changes in exchange rates on the dollar value of contractual obligations denominated in a foreign currency.

B. the extent to which the firm's operating cash flows will be affected by unexpected changes in exchange rates.

Economic exposure refers to A. 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. the extent to which the value of the firm would be affected by unanticipated changes in exchange rate.

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

B. will tend to strengthen the competitive position of import-competing U.S. car makers.

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 true D. None of the above is true

C. All of the above are true

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

C. both a and b

Generally speaking, a firm is subject to high degrees of operating exposure A. 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. when either its cost or its price is sensitive to exchange rate changes.

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. Both a and b

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. Both a and b

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. Both a and b

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

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.

Exposure to currency risk can be measured by the sensitivities of A. the future home currency values of the firm's assets and liabilities. B. the firm's operating cash flows to random changes in exchange rates. C. both a and b D. none of the above

C. both a and b

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. both a and b

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

C. both a and b

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

C. both a and b

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

C. both a and b

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

C. can have significant economic consequences for both U.S. and Japanese firms.

The firm may not be subject to high degrees of operating exposure A. when changes in real exchange rates are exactly offset by the inflation differential. B. when changes in nominal exchange rates are exactly matched by the inflation differential. C. when changes in nominal exchange rates are exactly offset by the inflation differential. D. none of the above

C. when changes in nominal exchange rates are exactly offset by the inflation differential.

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. B. R&D efforts can lead to the introduction of new and unique products for which competitors offer no close substitutes—since the demand for unique products tends to be highly inelastic the firm would be less exposed to exchange risk. C. successful 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

D. all of the above

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. None of the above

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

D. both a and b

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. both a and c

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)

D. 1), 2), 3), 4), and 5)

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

D. 75

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. Both a and c.

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.

D. None of the above.

A firm's operating exposure is A. defined as the extent to which the firm's operating cash flows would be affected by the random changes in exchange rates. B. 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. all of the above

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. all of the above

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. all of the above

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. both a and b

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. both b and c