Chapter 10, 12, 17
Simpson Sign Company based in Frostbite Falls, Minnesota has a 6-month C$100,000 contract to complete sign work in Winnipeg, Manitoba, Canada. The current spot rate is $1.02/C$ and the forward rate is $1.01/C$. Under conditions of equilibrium, management would use ________ today when preparing operating budgets. $102,000 $100,000 $101,000 none of the above
$101,000
Central Valley Transit Inc. (CVT) has just signed a contract to purchase light rail cars from a manufacturer in Germany for euro 3,000,000. The purchase was made in June with payment due six months later in December. Because this is a sizable contract for the firm and because the contract is in euros rather than dollars, CVT is considering several hedging alternatives to reduce the exchange rate risk arising from the sale. To help the firm make a hedging decision you have gathered the following information. Refer to Instruction 10.1. CVT chooses to hedge its transaction exposure in the forward market at the available forward rate. The required amount in dollars to pay off the accounts payable in 6 months will be: $3,750,000. $3,660,000. $3,000,000. $3,810,000.
$3,660,000.
________ 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. Transaction Accounting (aka translation) Economic Operating
Accounting (aka translation)
________ is NOT a commonly used contractual hedge against foreign exchange transaction exposure. Forward market hedge Money market hedge All of the above are contractual hedges. Options market hedge
All of the above are contractual hedges.
Which of the following is NOT a factor of Porter's "diamond of national advantage"? demand conditions related and supporting industries factor conditions All of the above are factors of the diamond of national advantage.
All of the above are factors of the diamond of national advantage
Of the following, which was NOT identified by the authors as a type of cultural difference that MNEs must consider when expanding to foreign countries? differences in religious heritage differences in allowable ownership structures differences in human resource norms All of the above must be considered
All of the above must be considered
Of the following, which was NOT identified by the authors as a type of cultural difference that MNEs must consider when expanding to foreign countries? differences in religious heritage differences in allowable ownership structures differences in human resource norms All of the above must be considered.
All of the above must be considered.
________ are transactions for which there are, at present, no contracts or agreements between parties. Backlog exposure Anticipated exposure none of the above Quotation exposure
Anticipated exposure
________ are transactions for which there are, at present, no contracts or agreements between parties. none of the above Backlog exposure Anticipated exposure Quotation exposure
Anticipated exposure
Which one of the following management techniques is likely to best offset the risk of long-run exposure to receivables denominated in a particular foreign currency? Lend money in the foreign currency in question. Increase sales in this country. Increase sales to that country. Borrow money in the foreign currency in question.
Borrow money in the foreign currency in question.
NorthRim Inc. (NRI), imports extreme condition outdoor wear and equipment from the Allofit Territories Company (ATC) located in Canada. With the steady decline of the U.S dollar against the Canadian dollar NRI is finding a continued relationship with ATC to be an increasingly difficult proposition. In response to NRI's request, ATC has proposed the following risk-sharing arrangement. First, set the current spot rate as the base rate. As long as spot rates stay within 5% (up or down) NRI will pay at the base rate. Any rate outside of the 5% range, ATC will share equally with NRI the difference between the spot rate and the base rate. If the current spot rate is C$1.20/$, what are the upper and lower limits for trading to take place at C$1.20? C$1.15/$ - C$1.25/$ C$1.14/$ - C$1.26/$ C$1.205/$ - C$1.195/$ none of the above
C$1.14/$ - C$1.26/$
________ risks are those that affect the MNE at the local or project level, but originate at the country level. Global-specific Firm-specific Country-specific none of the above
Country-specific
Recently the British Pound suffered an unexpected depreciation in value. Which of the following actions being considered by Coventry Furniture of London, a purely domestic furniture manufacturer and retailer, would be considered a highly unlikely response to the depreciation of the pound? Coventry might try to lower domestic prices because competing imports are now priced higher in England. Coventry might try to raise domestic prices because competing imports are now priced higher in England. Coventry might choose to maintain its domestic sales prices constant in pound terms. none of the above
Coventry might try to lower domestic prices because competing imports are now priced higher in England.
Which of the following is NOT cited as a good reason for hedging currency exposures? Reduced risk of future cash flows reduces the probability that the firm may not meet required cash flows. Management is in a better position to assess firm currency risk than individual investors. Currency risk management increases the expected cash flows to the firm. Reduced risk of future cash flows is a good planning tool.
Currency risk management increases the expected cash flows to the firm.
Central Valley Transit Inc. (CVT) has just signed a contract to purchase light rail cars from a manufacturer in Germany for euro 3,000,000. The purchase was made in June with payment due six months later in December. Because this is a sizable contract for the firm and because the contract is in euros rather than dollars, CVT is considering several hedging alternatives to reduce the exchange rate risk arising from the sale. To help the firm make a hedging decision you have gathered the following information. Refer to Instruction 10.1. CVT chooses to hedge its transaction exposure in the forward market at the available forward rate. The required amount in dollars to pay off the accounts payable in 6 months will be: $3,000,000. EUR3,000,000 x USD1.22/EUR = $3,660,000. $3,810,000. $3,750,000.
EUR3,000,000 x USD1.22/EUR = $3,660,000.
A strongly competitive home market tends to dull the competitive advantage relative to firms located in less competitive home markets. True False
False
Currency swaps are exclusively for periods of time under one year. True False
False
Diversifying the financing base means diversifying sales, location of production facilities, and raw material sources. True False
False
Management must be able to predict disequilibria in international markets to take advantage of diversification strategies. True False
False
Most swap dealers arrange swaps so that each firm that is a party to the transaction knows who the counterparty is. True False
False
Operating cash flows may occur in different currencies and at different times, but financing cash flows may occur only in a single currency. True False
False
The higher the price elasticity of demand, the higher the degree of pass-through. True False
False
Unexpected changes in exchange rates is never good news for a firm's operating income. True False
False
Which of the following is NOT one of classic trade-off confronting gloabl challengers according to the Boston Consulting Group? Growth versus market share Growth versus dividends Rapid expansion versus low leverage Volume versus margin
Growth versus market share
Which of the following is NOT true regarding behavioral observations of firms making a decision to invest internationally? MNEs initially invest in countries with a similar "national psychic." Initial investments tend to be much larger than subsequent ones. Firms eventually take greater risks in terms of the national psychic of countries in which they invest. All of the above have been observed.
Initial investments tend to be much larger than subsequent ones.
With licensing the ________ is likely to be lower than with FDI because of lower profits; however, the ________ is likely to be higher due to a greater return per dollar invested. cost of capital; NPV IRR; cost of capital IRR; NPV NPV; IRR
NPV; IRR
________ is a type of political risk that OPIC does NOT cover. Expropriation Inconvertibility War OPIC covers all of the above.
OPIC covers all of the above
________ is a type of political risk that OPIC does NOT cover. Expropriation Inconvertibility War OPIC covers all of the above.
OPIC covers all of the above.
________ exposure measures the change in the present value of the firm resulting from unexpected changes in exchange rates. Translation Correct! Operating Accounting Transaction
Operating
________ exposure is far more important for the long-run health of a business than changes caused by ________ or ________ exposure. Accounting; translation; transaction Operating; translation; transaction Transaction; operating; translation Translation; operating; transaction
Operating; translation; transaction
Which of the following is NOT an advantage to a joint venture? The local partner understands the customs and mores of the foreign market. May be a realistic alternative when 100% foreign ownership is not allowed. The local partner can provide competent management at many levels. Possible loss of opportunity to enter the foreign market with FDI later.
Possible loss of opportunity to enter the foreign market with FDI later.
________ industries are NOT typically "protected" by government policy. Defense "Infant" industries Textiles Agriculture
Textiles
________ industries are NOT typically "protected" by government policy. Defense "Infant" industries Textiles Agriculture
Textiles
When there is a full forward cover with the spot rate equal to the forward rate all of the following are true EXCEPT: The hedge is asymmetric. There is no uncovered exposure remaining. The currency hedge ratio is equal to 1. The total position is a perfect hedge.
The hedge is asymmetric.
Which of the following is NOT a typical characteristic of a fronting loan made to an international subsidiary? The parent makes a deposit equal to the size of the desired loan into a large commercial bank. The lending bank is located in the subsidiary's country. The bank lends to the subsidiary firm an amount equal to the parent deposit at a slightly higher interest rate. All of the above are typical characteristics of a fronting loan.
The lending bank is located in the subsidiary's country.
________ exposure deals with cash flows that result from existing contractual obligations. Transaction Translation Operating Economic
Transaction
After being introduced in the 1980s, currency swaps have gained increasing importance as financial derivative instruments. True False
True
Expected changes in foreign exchange rates should already be factored into anticipated operating results by management and investors. True False
True
If a firm diversifies its financing sources, it will be pre-positioned to take advantage of temporary deviations from the International Fisher Effect. True False
True
Moral hazard may occur when a firm or individual takes on more risk when it knows that someone else will "pick up the tab." True False
True
The goal of operating exposure analysis is to identify strategic operating techniques the firm might adopt to enhance value in the face of unanticipated exchange rate changes. True False
True
The strategy management undertakes in response to unexpected changes in exchange rates depends to a large measure on their opinion about the price elasticity of demand. True False
True
Each of the following is another name for operating exposure EXCEPT: accounting exposure. economic exposure. strategic exposure. competitive exposure.
accounting exposure.
A U.S. firm sells merchandise today to a British company for £150,000. The current exchange rate is $1.55/£ , the account is payable in three months, and the firm chooses to avoid any hedging techniques designed to reduce or eliminate the risk of changes in the exchange rate. The U.S. firm is at risk today of a loss if: the exchange rate changes to $1.58/£. the exchange rate doesn't change. the exchange rate changes to $1.52/£. all of the above
all of the above
MNE cash flows may be sensitive to changes in which of the following? all of the above commodity prices exchange rates interest rate
all of the above
MNE cash flows may be sensitive to changes in which of the following? exchange rates commodity prices interest rates all of the above
all of the above
The owner-specific advantages of OLI must be: not easily copied. transferable to foreign subsidiaries. firm-specific. all of the above
all of the above
When disequilibria in international markets occur, management can take advantage by: recognizing disequilibria faster than purely domestic competitors. shifting operational of financing activities to take advantage of the disequilibria. doing nothing if they are already diversified and able to realize beneficial portfolio effects. all of the above
all of the above
Based on observations of firms that have successfully invested abroad, we can conclude that one of the competitive advantages enjoyed by MNEs is: managerial expertise. competitiveness of their home markets. financial strength. all of the above are competitive advantages.
all of the above are competitive advantages.
An example of economies of scale in financing include: being able to use large-scale plant and equipment. being able to access the Euroequity, Eurobond, and Eurocurrency markets. being able to ship product in shiploads or carloads. all of the above
being able to access the Euroequity, Eurobond, and Eurocurrency markets.
Central Valley Transit Inc. (CVT) has just signed a contract to purchase light rail cars from a manufacturer in Germany for euro 3,000,000. The purchase was made in June with payment due six months later in December. Because this is a sizable contract for the firm and because the contract is in euros rather than dollars, CVT is considering several hedging alternatives to reduce the exchange rate risk arising from the sale. To help the firm make a hedging decision you have gathered the following information. Refer to Instruction 10.1. CVT would be ________ by an amount equal to ________ with a forward hedge than if they had NOT hedged and their predicted exchange rate for 6 months had been correct. better off; $150,000 better off; €150,000 worse off; €150,000 worse off; $150,000
better off; $150,000
Central Valley Transit Inc. (CVT) has just signed a contract to purchase light rail cars from a manufacturer in Germany for euro 3,000,000. The purchase was made in June with payment due six months later in December. Because this is a sizable contract for the firm and because the contract is in euros rather than dollars, CVT is considering several hedging alternatives to reduce the exchange rate risk arising from the sale. To help the firm make a hedging decision you have gathered the following information. Refer to Instruction 10.1. CVT would be ________ by an amount equal to ________ with a forward hedge than if they had NOT hedged and their predicted exchange rate for 6 months had been correct. better off; €150,000 better off; $150,000 worse off; €150,000 worse off; $150,000
better off; $150,000
Central Valley Transit Inc. (CVT) has just signed a contract to purchase light rail cars from a manufacturer in Germany for euro 3,000,000. The purchase was made in June with payment due six months later in December. Because this is a sizable contract for the firm and because the contract is in euros rather than dollars, CVT is considering several hedging alternatives to reduce the exchange rate risk arising from the sale. To help the firm make a hedging decision you have gathered the following information. Refer to Instruction 10.1. If CVT chooses to hedge its transaction exposure in the forward market, it will ________ euro 3,000,000 forward at a rate of ________. buy; $1.25 sell; €1.25 buy; $1.22 sell; $1.22
buy; $1.22
Central Valley Transit Inc. (CVT) has just signed a contract to purchase light rail cars from a manufacturer in Germany for euro 3,000,000. The purchase was made in June with payment due six months later in December. Because this is a sizable contract for the firm and because the contract is in euros rather than dollars, CVT is considering several hedging alternatives to reduce the exchange rate risk arising from the sale. To help the firm make a hedging decision you have gathered the following information. Refer to Instruction 10.1. If CVT chooses to hedge its transaction exposure in the forward market, it will ________ euro 3,000,000 forward at a rate of ________. sell; €1.25 buy; $1.22 buy; $1.25 sell; $1.22
buy; $1.22
A ________ resembles a back-to-back loan except that it does not appear on a firm's balance sheet. forward loan currency swap currency hedge counterparty
currency swap
An MNE has a contract for a relatively predictable long-term inflow of Japanese yen that the firm chooses to hedge by paying for imports from Canada in Japanese yen. This hedging strategy is known as: diversification. a natural hedge. matching. currency-switching.
currency-switching.
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 ________. increase; not change decrease; not change not change; increase not change; not change
decrease; not change
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 ________. not change; not change not change; increase increase; not change decrease; not change
decrease; not change
A Canadian firm with a U.S. subsidiary and a U.S. firm with a Canadian subsidiary agree to a parallel loan agreement. In such an agreement, the Canadian firm is making a/an ________ loan to the ________ subsidiary while effectively financing the ________ subsidiary. indirect; U.S.; Canadian direct; Canadian; U.S. indirect; Canadian; U.S. direct; U.S.; Canadian
direct; U.S.; Canadian
Which of the following is NOT an example of diversification in financing? diversifying sales raising funds in more than one market raising funds in more than one country All of the above qualify.
diversifying sales
Purely domestic firms will be at a disadvantage to MNEs in the event of market disequilibria because: international firms are already so large. all of the domestic firm's raw materials are imported. domestic firms lack comparative data from its own sources. None of the above; domestic firms are not at a disadvantage.
domestic firms lack comparative data from its own sources.
Which of the following is NOT a form of FDI? joint venture wholly-owned affiliate exporting greenfield investment
exporting
Which of the following is NOT a form of FDI? joint venture wholly-owned affiliate exporting greenfield investment
exporting
Governance risk due to goal conflict between an MNE and its host government is the main political ________ risk. country-specific global-specific firm-specific cultural-specific
firm-specific
The OLI paradigm is an attempt to create a framework to explain why MNEs choose ________ rather than some other form of international venture. strategic alliances foreign direct investment licensing joint ventures
foreign direct investment
The OLI paradigm is an attempt to create a framework to explain why MNEs choose ________ rather than some other form of international venture. strategic alliances foreign direct investment licensing joint ventures
foreign direct investment
A U.S. firm sells merchandise today to a British company for £150,000. The current exchange rate is $1.55/£ , the account is payable in three months, and the firm chooses to avoid any hedging techniques designed to reduce or eliminate the risk of changes in the exchange rate. If the exchange rate changes to $1.58/£ the U.S. firm will realize a ________ of ________. loss; $4,500 loss; £4,500 gain; £4,500 gain; $4,500
gain; $4,500
Central Valley Transit Inc. (CVT) has just signed a contract to purchase light rail cars from a manufacturer in Germany for euro 3,000,000. The purchase was made in June with payment due six months later in December. Because this is a sizable contract for the firm and because the contract is in euros rather than dollars, CVT is considering several hedging alternatives to reduce the exchange rate risk arising from the sale. To help the firm make a hedging decision you have gathered the following information. Refer to Instruction 10.1. If CVT locks in the forward hedge at $1.22/euro, and the spot rate when the transaction was recorded on the books was $1.25/euro, this will result in a "foreign exchange accounting transaction ________ of ________. loss; $90,000. gain; $90,000. loss; €90,000. gain; €90,000.
gain; $90,000.
Terrorism, cyber attacks, and the anti-globalization movement are each examples of ________ risks. institutional country-specific firm-specific global-specific
global-specific
Which of the following is NOT an advantage to exporting goods to reach international markets rather than entering into some form of FDI? greater agency costs lower front-end investment fewer political risks All of the above are advantages.
greater agency costs
For a firm that competes internationally to sell its products, a depreciation of its domestic currency relative to markets where the firm exports goods, should eventually result in ________ sales at home and ________ sales abroad, other things equal. fewer; greater greater; greater greater; fewer fewer; fewer
greater; greater
Blocked funds are cash flows that: come from a certain sector or region of the world. come in regular intervals in standardized amounts or blocks. have been restricted in transfer out of a local country. none of the above
have been restricted in transfer out of a local country.
Blocked funds are cash flows that: come from a certain sector or region of the world. come in regular intervals in standardized amounts or blocks. have been restricted in transfer out of a local country. none of the above
have been restricted in transfer out of a local country.
A ________ is a shared ownership in a foreign business. joint venture wholly-owned affiliate greenfield investment licensing agreement
joint venture
A U.S. firm sells merchandise today to a British company for £150,000. The current exchange rate is $1.55/£ , the account is payable in three months, and the firm chooses to avoid any hedging techniques designed to reduce or eliminate the risk of changes in the exchange rate. If the exchange rate changes to $1.52/£ the U.S. firm will realize a ________ of ________. gain; £4,500 loss; $4,500 gain; $4,500 loss; £4,500
loss; $4,500
The particular strategy of trying to offset stable inflows of cash from one country with outflows of cash in the same currency is known as: diversification. balancing. hedging. matching.
matching.
According to your authors, MNEs can anticipate government regulations that are discriminatory or wealth depriving from a/an ________ or ________ level view. internal; external local; global foreign; domestic micro; macro
micro; macro
As a result of the terrorist attacks of September 11, 2001, many firms have employed a wide range of tactics to ensure continued flow of inventory in the face of government steps to curb terrorism. Which of the following is an inventory sourcing strategy response (as opposed to an inventory management response, or a transportation response)? shifting to air cargo shipments instead of co-habitation of products and passengers on commercial air flights increasing the on-hand supply of critical parts carrying more inventory on-hand minimizing cross-border exposure from suppliers
minimizing cross-border exposure from suppliers
A ________ hedge refers to an offsetting operating cash flow such as a payable arising from the conduct of business. financial futures contractual natural
natural
A ________ hedge refers to an offsetting operating cash flow such as a payable arising from the conduct of business. financial futures natural contractual
natural
What type of international risk exposure measures the change in present value of a firm resulting from changes in future operating cash flows caused by any unexpected change in exchange rates? translation exposure accounting exposure transaction exposure operating exposure
operating exposure
A/An ________ would be an example of an internalization advantage for an MNE. economy of scale patent possession of proprietary information unique source of raw materials
possession of proprietary information
The stages in the life of a transaction exposure can be broken into three distinct time periods. The first time period is the time between quoting a price and reaching an actual sale agreement or contract. The next time period is the time lag between taking an order and actually filling or delivering it. Finally, the time it takes to get paid after delivering the product. In order, these stages of transaction exposure may be identified as: quotation, billing, and backlog exposure. quotation, backlog, and billing exposure. backlog, quotation, and billing exposure. billing, backlog, and quotation exposure.
quotation, backlog, and billing exposure.
Which of the following is NOT an example of diversifying operations? raising funds in more than one country sourcing raw materials in more than one country diversifying sales diversifying location of operations
raising funds in more than one country
Which of the following is NOT identified by your authors as a proactive management technique to reduce exposure to foreign exchange risk? parallel loans remaining a purely domestic firm cross-currency swaps matching currency cash flows
remaining a purely domestic firm
According to a survey by Bank of America, the type of foreign exchange risk most often hedged by firms is: translation exposure. contingent exposure. economic exposure. transaction exposure.
transaction exposure
According to a survey by Bank of America, the type of foreign exchange risk most often hedged by firms is: economic exposure. contingent exposure. Correct! transaction exposure. translation exposure. economic exposure. contingent exposure. transaction exposure. translation exposure.
transaction exposure.
Losses from ________ exposure generally reduce taxable income in the year they are realized. ________ exposure losses may reduce taxes over a series of years. accounting; Operating transaction; Operating operating; Transaction transaction; Accounting
transaction; Operating
Losses from ________ exposure generally reduce taxable income in the year they are realized. ________ exposure losses may reduce taxes over a series of years. operating; Transaction transaction; Operating accounting; Operating transaction; Accounting
transaction; Operating
Losses from ________ exposure generally reduce taxable income in the year they are realized. ________ exposure losses are not cash losses and therefore, are not tax deductible. accounting; Operating transaction; Translation transaction; Operating accounting; Transaction
transaction; Translation
Losses from ________ exposure generally reduce taxable income in the year they are realized. ________ exposure losses are not cash losses and therefore, are not tax deductible. transaction; Operating transaction; Translation accounting; Operating accounting; Transaction
transaction; Translation
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. operating; accounting transaction; operating operating; transaction none of the above
transaction; operating
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. operating; accounting none of the above transaction; operating operating; transaction
transaction; operating
A/An ________ would be an example of a location-specific advantage for an MNE. possession of proprietary information patent unique source of raw materials economy of scale
unique source of raw materials
Central Valley Transit Inc. (CVT) has just signed a contract to purchase light rail cars from a manufacturer in Germany for euro 3,000,000. The purchase was made in June with payment due six months later in December. Because this is a sizable contract for the firm and because the contract is in euros rather than dollars, CVT is considering several hedging alternatives to reduce the exchange rate risk arising from the sale. To help the firm make a hedging decision you have gathered the following information. Refer to Instruction 10.1. If CVT chooses NOT to hedge their euro payable, the amount they pay in six months will be: $3,500,000. unknown today €3,000,000. $3,900,000.
unknown today