IF: Chapter 10 Multiple Choice Questions

11) MNE cash flows may be sensitive to changes in which of the following? A) Exchange Rates B) Commodity Prices C) Interest Rates D) All

D) All

12) Which of the following is cited as a good reason for NOT hedging currency exposures? A) Hedging activities are often of greater benefit to management than to shareholders. B) Currency risk management through hedging does not increase expected cash flows. C) Shareholders are more capable of diversifying risk than management D) All of the above are cited as reasons NOT to hedge.

D) All of the above are cited as reasons NOT to hedge.

16) ________ is NOT a commonly used contractual hedge against foreign exchange transaction exposure. A) Forward market hedge B) Money market hedge C) Options market hedge D) All of the above are contractual hedges.

D) All of the above are contractual hedges.

Refer to Instruction 10.2. The cost of a put option to CVT would be: A) $55,338 B) $52,500 C) $58,275 D) Not enough info

D) Not enough info

Refer to Instruction 10.1. If CVT chooses NOT to hedge their euro payable, the amount they pay in six months will be: A) $3,500,000. B) $3,900,000. C) €3,000,000. D) unknown today

D) Unknown today

8) Each of the following is another name for operating exposure EXCEPT: A) strategic exposure. B) economic exposure. C) competitive exposure. D) accounting exposure.

D) accounting exposure.

3) 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: A) the exchange rate changes to $1.58/£. B) the exchange rate doesn't change. C) the exchange rate changes to $1.52/£. D) all of the above

D) all of the above

2) According to a survey by Bank of America, the type of foreign exchange risk most often hedged by firms is: A) translation exposure. B) economic exposure. C) contingent exposure. D) transaction exposure.

D) transaction exposure.

15) A __ hedge refers to an offsetting operating cash flow such as a payable arising from the conduct of business A)Natural B) Financial C) Contractual D) Futures

A) Natural

7) 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. A) better off; $150,000 B) better off; €150,000 C) worse off; $150,000 D) worse off; €150,000

A) better off; $150,000

6) Losses from ________ exposure generally reduce taxable income in the year they are realized. ________ exposure losses may reduce taxes over a series of years. A) transaction; Operating B) accounting; Operating C) Operating; Transaction D) Transaction; Accounting

A) transaction; Operating

___ exposure measures the change in the present value of the firm resulting from an unexpected change in exchange rates A) Accounting B) Operating C) Translation D) Transaction

B) Operating

5) 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 ________. A) buy; $1.25 B) buy; $1.22 C) sell; €1.25 D) sell; $1.22

B) buy; $1.22

Losses from ________ exposure generally reduce taxable income in the year they are realized. ________ exposure losses may reduce taxes over a series of years. A) transaction; Operating B) transaction; Translation C) accounting; Operating D) Accounting; transaction

B) 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. A) operating; accounting B) transaction; operating C) operating; transaction D) none of the above

B) transaction; operating

3) 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: A) $3,750,000. B) $3,000,000. C) $3,660,000. D) $3,810,000.

C) $3,660,000.

4) Refer to Instruction 10.1. What is the cost of a call option hedge for CVT's euro receivable contract? (Note: Calculate the cost in future value dollars and assume the firm's cost of capital as the appropriate interest rate for calculating future values.) A) $57,600 B) $62,208 C) $59,904 D) $63,936

C) $59,904

________ 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. A) Operating B) Economic C) Accounting (aka translation) D) Transaction

C) Accounting (aka translation)

___ are transactions of which there are at present, no contracts or agreements between parties A) Quotation exposure B) Backlog C) Anticipated D) non

C) Anticipated exposure

13) ___ exposure deals with cash flows that result from contractual obligations. A) Operating B) Translation C) Transaction D) Economic

C) Transaction Exposure

9) 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 ________. A) not change; not change B) not change; increase C) decrease; not change D) increase; not change

C) decrease; not change

2) 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 ________. A) gain; £4,500 B) loss; £4,500 C) gain; $4,500 D) loss; $4,500

C) gain; $4,500

14) 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 ________. A) loss; E4,500 B) gain; E4,500 C) loss; $4,500 D) gain; $4,500

C) loss; $4,500

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: A) backlog, quotation, and billing B) billing, backlog, quotation C) quotation, backlog, and billing D) quotation, billing, and backlog

C) quotation, backlog, and billing

1) 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 ________. A) loss; $90,000. B) gain; €90,00 C) gain; $90,000. D) loss; €90,000.

C: gain; $90,000