FIN 417

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

A) exchange rates B) interest rates C) commodity prices D) all of the above x

________ is the possibility that the borrower's creditworthiness is reclassified by the lender at the time of renewing credit. ________ is the risk of changes in interest rates charged at the time a financial contract rate is reset.

Credit risk; Repricing risk

Which of the following is NOT cited as a good reason for hedging currency exposures?

Currency risk management increases the expected cash flows to the firm.

Interest rate calculations differ by the number of days used in the period's calculation and in the definition of how many days there are in a year (for financial purposes). One of the practices is to use 260 business days in a year

False

Sovereign credit risk is the global financial market's assessment of the ability of a sovereign borrower to repay USD denominated debt.

False

When attempting to manage an account payable denominated in a foreign currency, the firm's only choice is to remain unhedged.

False

If a financial manager with an interest liability on a future date were to sell Futures and interest rates end up going up, the position outcome would be:

Futures price falls; short earns a profit.

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

Operating

________ exposure deals with cash flows that result from existing contractual obligations.

Transaction

Hedging can be advantageous to shareholders because management is in a better position than shareholders to recognize disequilibrium conditions and to take advantage of single opportunities to enhance firm value through selective hedging

True

Historically, interest rate movements have shown less variability and greater stability than exchange rate movements

True

The basis point spreads between credit ratings dramatically rise for borrowers of credit qualities less than BBB.

True

Transaction exposure measures gains or losses that arise from the settlement of existing financial obligations whose terms are stated in a foreign currency

True

Each of the following is another name for operating exposure EXCEPT:

accounting exposure.

The single largest interest rate risk of a firm is:

debt service

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 flows should ________.

decrease; not change

An interbank-traded contract to buy or sell interest rate payments on a notional principal is called a/an:

forward rate agreement

A ________ hedge refers to an offsetting operating cash flow such as a payable arising from the conduct of business.

natural

Individual borrowers - whether they be governments or companies - possess their own individual credit rating, the market's assessment of their ability to repay debt in a timely manner. These credit assessments influence all the following EXCEPT:

risk-free rate.

The financial manager of a firm has a variable rate loan outstanding. If she wishes to protect the firm against an unfavorable increase in interest rates she could:

sell an interest rate futures contract of a similar maturity to the loan.

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

transaction; operating