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9 Student: ___________________________________________________________________________

1.

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

2.

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

3.

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

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

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

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

7.

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

8.

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.

9.

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

10. 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. 11. 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. 12. 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 13. 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 14. The exposure coefficient in the regression A. B. C.

is given by:

15. The exposure coefficient in the regression is: A. A measure of how a change in the exchange rate affects the dollar value of a firm's assets. B. Has a value of zero if the value of the firm's assets is perfectly correlated with changes in the exchange rate. C. both a and b D. none of the above 16. The exposure coefficient in the regression informs A. how much of a foreign currency to sell forward. B. the part of the variability of the dollar value of the asset that is related to random changes in the exchange rate. C. captures the residual part of the dollar value variability that is independent of exchange rate movements. D. how many call options to write. 17. Before you can use the hedging strategies such as a forward market hedge, options market hedge, and so on, you should consider running a regression of the form . When reviewing the output, you should initially focus on A. the intercept a. B. the slope coefficient b. C. mean square error, MSE. D. R2. 18. 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 19. 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 20. 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 21. 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.

22. 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 23. On the basis of regression Equation we can decompose the variability of the dollar value of the asset, Var(P), into two separate components. A. Cov(P,S) = b2 × Var(P) + Var(S) B. Var(P) = b2 × Var(S) + Var(e) C. Cov(P,S) = b2 × Cov(S,P) + Cov(S,e) D. Var(P) = b2 × Var(S) E. None of the above 24. On the basis of regression Equation we can decompose the variability of the dollar value of the asset, Var(P), into two separate components Var(P) = b2 × Var(S) + Var(e). The first term in the right-hand side of the equation, b2 × Var(S) represents. A. the part of the variability of the dollar value of the asset that is related to random changes in the exchange rate. B. captures the residual part of the dollar value variability that is independent of exchange rate movements. C. none of the above 25. On the basis of regression Equation we can decompose the variability of the dollar value of the asset, Var(P), into two separate components Var(P) = b2 × Var(S) + Var(e). The second term in the right-hand side of the equation, Var(e) represents. A. the part of the variability of the dollar value of the asset that is related to random changes in the exchange rate. B. captures the residual part of the dollar value variability that is independent of exchange rate movements. C. none of the above 26. 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 27. 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. 28. 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.

29. 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 30. 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 31. 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 32. 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 33. 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) A U.S. firm holds an asset in Great Britain and faces the following scenario:

where, P* = Pound sterling price of the asset held by the U.S. firm P = Dollar price of the same asset 34. The expected value of the investment in U.S. dollars is A. $4,950. B. $3,700. C. $2,112.50. D. none of the above

35. The variance of the exchange rate is: A. 0.0200 B. 0.10 C. 0.002 D. none of the above 36. The "exposure" (i.e. the regression coefficient beta) is:

A. B. C. D.

-25,000 2,5000 -2,500 none of the above

37. Which of the following conclusions are correct? AMost of the volatility of the dollar value of the British asset can be removed by hedging exchange risk . because b2[Var(S)] and Var(e) are 236,717 ($)2 and 493,751 ($)2 respectively. BMost of the volatility of the dollar value of the British asset cannot be removed by hedging exchange . risk because b2[Var(S)] and Var(e) are 236,717 ($)2 and 493,751 ($)2 respectively. CMost of the volatility of the dollar value of the British asset cannot be removed by hedging exchange . risk because b2[Var(S)] and Var(e) are 125,000 ($)2 and -127,500 ($)2 respectively. DMost of the volatility of the dollar value of the British asset can be removed by hedging exchange risk . because b2[Var(S)] and Var(e) are 125,000 ($)2 and -127,500 ($)2 respectively. 38. Which of the following would be an effective hedge? A. Sell £2,500 forward at the 1-year forward rate, F1($/£), that prevails at time zero. B. Buy £2,500 forward at the 1-year forward rate, F1($/£), that prevails at time zero. C. Sell £25,000 forward at the 1-year forward rate, F1($/£), that prevails at time zero. D. None of the above A U.S. firm holds an asset in Great Britain and faces the following scenario:

where, P* = Pound sterling price of the asset held by the U.S. firm P = Dollar price of the same asset 39. The expected value of the investment in U.S. dollars is: A. $5,050 B. $3,700 C. $2,112.50 D. none of the above 40. The variance of the exchange rate is: A. 0.0200 B. 0.10 C. 0.002 D. none of the above

41. The "exposure" (i.e. the regression coefficient beta) is:

A. B. C. D.

7,500 2,5000 -2,500 none of the above

42. Which of the following conclusions are correct? AMost of the volatility of the dollar value of the British asset can be removed by hedging exchange risk . because b2[Var(S)] and Var(e) are 1,125,000 ($)2 and 2,500 ($)2 respectively. BMost of the volatility of the dollar value of the British asset cannot be removed by hedging exchange . risk because b2[Var(S)] and Var(e) are 236,717 ($)2 and 493,751 ($)2 respectively. CMost of the volatility of the dollar value of the British asset cannot be removed by hedging exchange . risk because b2[Var(S)] and Var(e) are 125,000 ($)2 and -127,500 ($)2 respectively. DMost of the volatility of the dollar value of the British asset can be removed by hedging exchange risk . because b2[Var(S)] and Var(e) are 125,000 ($)2 and -127,500 ($)2 respectively. 43. Which of the following would be an effective hedge? A. Sell £7,500 forward at the 1-year forward rate, F1($/£), that prevails at time zero. B. Buy £2,500 forward at the 1-year forward rate, F1($/£), that prevails at time zero. C. Sell £25,000 forward at the 1-year forward rate, F1($/£), that prevails at time zero. D. None of the above A U.S. firm holds an asset in Great Britain and faces the following scenario:

where, P* = Pound sterling price of the asset held by the U.S. firm P = Dollar price of the same asset 44. The expected value of the investment in U.S. dollars is: A. $5,050 B. $4,500 C. $2,112.50 D. none of the above 45. The variance of the exchange rate is: A. 0.0200 B. 0.101875 C. 0.002 D. none of the above 46. The "exposure" (i.e. the regression coefficient beta) is:

A. B. C. D.

7,500 2,5000 -2,500 none of the above

47. Which of the following conclusions are correct? A Most of the volatility of the dollar value of the British asset can be removed by hedging exchange risk . because b2[Var(S)] and Var(e) are 0 ($)2 and 0 ($)2 respectively. B None of the volatility of the dollar value of the British asset can be removed by hedging exchange risk . because b2[Var(S)] and Var(e) are 0 ($)2 and 0 ($)2 respectively. CMost of the volatility of the dollar value of the British asset cannot be removed by hedging exchange . risk because b2[Var(S)] and Var(e) are 125,000 ($)2 and -127,500 ($)2 respectively. DMost of the volatility of the dollar value of the British asset can be removed by hedging exchange risk . because b2[Var(S)] and Var(e) are 125,000 ($)2 and -127,500 ($)2 respectively. 48. Which of the following would be an effective hedge? A. Sell £2,278.13 forward at the 1-year forward rate, F1($/£), that prevails at time zero. B. Buy £2,500 forward at the 1-year forward rate, F1($/£), that prevails at time zero. C. Sell £25,000 forward at the 1-year forward rate, F1($/£), that prevails at time zero. D. None of the above A U.S. firm holds an asset in Israel and faces the following scenario:

where, P* = Israeli shekel (IS) price of the asset held by the U.S. firm P = Dollar price of the same asset 49. The expected value of the investment in U.S. dollars is: A. $2,083.33 B. $762.50 C. $6,250.00 D. $6,562.50 50. The variance of the exchange rate is: A. 0.001968 B. 0.002969 C. 0.003968 D. 0.004968 51. The "exposure" (i.e. the regression coefficient beta) is:

A. B. C. D.

-52.6316 1,289.80 12,898.00 none of the above

52. Which of the following conclusions are correct? AMost of the volatility of the dollar value of the Israeli asset can be removed by hedging exchange risk . because b2[Var(S)] and Var(e) are 236,717 ($)2 and 493,751 ($)2 respectively. BMost of the volatility of the dollar value of the Israeli asset cannot be removed by hedging exchange . risk because b2[Var(S)] and Var(e) are 236,717 ($)2 and 493,751 ($)2 respectively. CMost of the volatility of the dollar value of the Israeli asset cannot be removed by hedging exchange . risk because b2[Var(S)] and Var(e) are 8.22 ($)2 and 59,211 ($)2, respectively. DMost of the volatility of the dollar value of the Israeli asset can be removed by hedging exchange risk . because b2[Var(S)] and Var(e) are 8.22 ($)2 and 59,211 ($)2 respectively.

53. 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 54. Find an effective hedge financial hedge if a U.S. firm holds an asset in Great Britain and faces the following scenario:

P* = Pound sterling price of the asset held by the U.S. firm P = Dollar price of the same asset The CFO runs a regression of the form

The regression coefficient beta is calculated as Where

The variance of the exchange rate is calculated as: E(S) = 0.25 × $2.20 + 0.50 × $2.00 + 0.25 × $1.80 = $.55 + $1 + $.45 = $2.00 VAR(S) = 0.25($2.20 - $2.00)2 + 0.50($2.00 - $2.00)2 + 0.25($1.80 - $2.00)2 = 0.01 + 0 + 0.01 = 0.02 The expected value of the investment in U.S. dollars is: E[P] = 0.25 × $6,600 + 0.50 × $5,000 + 0.25 × $3,600 = $5,050 Which of the following is the most effective hedge financial hedge? A. Sell £7,500 forward at the 1-year forward rate, F1($/£), that prevails at time zero. B. Buy £7,500 forward at the 1-year forward rate, F1($/£), that prevails at time zero. C. Sell £2,500 forward at the 1-year forward rate, F1($/£), that prevails at time zero. D. 0.25 × £3,000 + 0.50 × £2,500 + 0.25 × £2,000 = £2,500 55. Suppose that you implement your hedge from the last question at F1($/£) = $2/£. Your cash flows in state 1, 2, and 3 respectively will be A. $5,100, $5,000, $5,100. B. $5,100, $5,100, $5,100. C. $5,000, $5,000, $5,000. D. none of the above

56. A U.S. firm holds an asset in Great Britain and faces the following scenario:

Where P* = Pound sterling price of the asset held by the U.S. firm The CFO decides to hedge his exposure by selling forward the expected value of the pound denominated cash flow at F1($/£) = $2/£. As a result A. The firm's exposure to the exchange rate is made worse. B. He has a nearly perfect hedge. C. He has a perfect hedge. D. None of the above 57. A U.S. firm holds an asset in Italy and faces the following scenario:

Where P* = Euro price of the asset held by the U.S. firm The CFO decides to hedge his exposure by selling forward the expected value of the euro denominated cash flow at F1($/£) = $1.50/€. As a result A. the firm's exposure to the exchange rate is made worse. B. he has a nearly perfect hedge. C. he has a perfect hedge. D. none of the above 58. 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.

Which 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.

59. 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.

Which 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. 60. 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.

Which 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. 61. Suppose a U.S. firm has an asset in Italy 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 asset (P*) as well as the future exchange rate (S) will be determined, depending on the realized state of the world.

Assume that you choose to "hedge" this asset by selling forward the expected value of the euro denominated cash flow at F1($/£) = $1.50/€. Calculate your cash flows in each of the possible states. A. $1,400, $1,400, $1,400 B. $1,496.6, $1,400, $1,306.40 C. $1,404, $1,404. $1,404 D. None of the above

62. 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 63. 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 64. 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 65. 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 66. 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 67. 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? AThe 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

68. Which of the following is true? AThe 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 69. 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. 70. 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 71. 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 72. 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 73. 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 74. 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 75. 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

76. 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 77. 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 78. 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 79. 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 80. 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. 81. 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 82. 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 83. 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 84. 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

85. 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 86. 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. 87. 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. 88. 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. 89. 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 90. 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. 91. 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. 92. 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

93. 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 94. 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 95. In the figure at right, label curves A and B respectively,

A. B. C. D.

unhedged, hedged. hedged, unhedged. normal, abnormal. none of the above

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. BR&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. Csuccessful 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 97. 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 Suppose that you hold a piece of land in the city of London that you may want to sell in one year. As a U.S. resident, you are concerned with the dollar value of the land. Assume that if the British economy booms in the future, the land will be worth £2,000, and one British pound will be worth $1.80. If the British economy slows down, on the other hand, the land will be worth less, say, £1,500, but the pound will be stronger, say, $2.20/£. You feel that the British economy will experience a boom with a 60 percent probability and a slowdown with a 40 percent probability.

98. Estimate your exposure (b) to the exchange risk.

99. Compute the variance of the dollar value of your property that is attributable to exchange rate uncertainty.

100.Discuss how you can hedge your exchange risk exposure and also examine the consequences of hedging.

9 Key 1.

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 Eun - Chapter 09 #1 Topic: How to Measure Economic Exposure

2.

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 Eun - Chapter 09 #2 Topic: How to Measure Economic Exposure

3.

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 Eun - Chapter 09 #3 Topic: How to Measure Economic Exposure

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 Eun - Chapter 09 #4 Topic: How to Measure Economic Exposure

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 Eun - Chapter 09 #5 Topic: How to Measure Economic Exposure

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 Eun - Chapter 09 #6 Topic: How to Measure Economic Exposure

7.

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 Eun - Chapter 09 #7 Topic: How to Measure Economic Exposure

8.

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. Eun - Chapter 09 #8 Topic: How to Measure Economic Exposure

9.

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 Eun - Chapter 09 #9 Topic: How to Measure Economic Exposure

10.

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. Eun - Chapter 09 #10 Topic: How to Measure Economic Exposure

11.

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. Eun - Chapter 09 #11 Topic: How to Measure Economic Exposure

12.

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 Eun - Chapter 09 #12 Topic: How to Measure Economic Exposure

13.

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 Eun - Chapter 09 #13 Topic: How to Measure Economic Exposure

14.

The exposure coefficient in the regression A.

is given by:

B. C. Eun - Chapter 09 #14 Topic: How to Measure Economic Exposure

15. The exposure coefficient in the regression is: A. A measure of how a change in the exchange rate affects the dollar value of a firm's assets. B. Has a value of zero if the value of the firm's assets is perfectly correlated with changes in the exchange rate. C. both a and b D. none of the above Eun - Chapter 09 #15 Topic: How to Measure Economic Exposure

16. The exposure coefficient in the regression informs A. how much of a foreign currency to sell forward. B. the part of the variability of the dollar value of the asset that is related to random changes in the exchange rate. C. captures the residual part of the dollar value variability that is independent of exchange rate movements. D. how many call options to write. Eun - Chapter 09 #16 Topic: How to Measure Economic Exposure

17.

Before you can use the hedging strategies such as a forward market hedge, options market hedge, and so on, you should consider running a regression of the form . When reviewing the output, you should initially focus on A. the intercept a. B. the slope coefficient b. C. mean square error, MSE. D. R2. Eun - Chapter 09 #17 Topic: How to Measure Economic Exposure

18.

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 Eun - Chapter 09 #18 Topic: How to Measure Economic Exposure

19.

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 Eun - Chapter 09 #19 Topic: How to Measure Economic Exposure

20.

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 Eun - Chapter 09 #20 Topic: How to Measure Economic Exposure

21.

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. Eun - Chapter 09 #21 Topic: How to Measure Economic Exposure

22.

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 Eun - Chapter 09 #22 Topic: How to Measure Economic Exposure

23.

On the basis of regression Equation we can decompose the variability of the dollar value of the asset, Var(P), into two separate components. A. Cov(P,S) = b2 × Var(P) + Var(S) B. Var(P) = b2 × Var(S) + Var(e) C. Cov(P,S) = b2 × Cov(S,P) + Cov(S,e) D. Var(P) = b2 × Var(S) E. None of the above Eun - Chapter 09 #23 Topic: How to Measure Economic Exposure

24.

On the basis of regression Equation we can decompose the variability of the dollar value of the asset, Var(P), into two separate components Var(P) = b2 × Var(S) + Var(e). The first term in the right-hand side of the equation, b2 × Var(S) represents. A. the part of the variability of the dollar value of the asset that is related to random changes in the exchange rate. B. captures the residual part of the dollar value variability that is independent of exchange rate movements. C. none of the above Eun - Chapter 09 #24 Topic: How to Measure Economic Exposure

25.

On the basis of regression Equation we can decompose the variability of the dollar value of the asset, Var(P), into two separate components Var(P) = b2 × Var(S) + Var(e). The second term in the right-hand side of the equation, Var(e) represents. A. the part of the variability of the dollar value of the asset that is related to random changes in the exchange rate. B. captures the residual part of the dollar value variability that is independent of exchange rate movements. C. none of the above Eun - Chapter 09 #25 Topic: How to Measure Economic Exposure

26.

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 Eun - Chapter 09 #26 Topic: How to Measure Economic Exposure

27.

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. Eun - Chapter 09 #27 Topic: How to Measure Economic Exposure

28.

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. Eun - Chapter 09 #28 Topic: Operating Exposure: Definition

29.

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 Eun - Chapter 09 #29 Topic: Operating Exposure: Definition

30.

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 Eun - Chapter 09 #30 Topic: Operating Exposure: Definition

31.

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 Eun - Chapter 09 #31 Topic: Operating Exposure: Definition

32.

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 Eun - Chapter 09 #32 Topic: Operating Exposure: Definition

33.

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) Eun - Chapter 09 #33 Topic: Operating Exposure: Definition

A U.S. firm holds an asset in Great Britain and faces the following scenario:

where, P* = Pound sterling price of the asset held by the U.S. firm P = Dollar price of the same asset Eun - Chapter 09

34.

The expected value of the investment in U.S. dollars is A. $4,950. B. $3,700. C. $2,112.50. D. none of the above Eun - Chapter 09 #34 Topic: Operating Exposure: Definition

35.

The variance of the exchange rate is: A. 0.0200 B. 0.10 C. 0.002 D. none of the above Eun - Chapter 09 #35 Topic: Operating Exposure: Definition

36.

The "exposure" (i.e. the regression coefficient beta) is:

A. B. C. D.

-25,000 2,5000 -2,500 none of the above Eun - Chapter 09 #36 Topic: Operating Exposure: Definition

37.

Which of the following conclusions are correct? AMost of the volatility of the dollar value of the British asset can be removed by hedging exchange . risk because b2[Var(S)] and Var(e) are 236,717 ($)2 and 493,751 ($)2 respectively. B Most of the volatility of the dollar value of the British asset cannot be removed by hedging exchange . risk because b2[Var(S)] and Var(e) are 236,717 ($)2 and 493,751 ($)2 respectively. C Most of the volatility of the dollar value of the British asset cannot be removed by hedging exchange . risk because b2[Var(S)] and Var(e) are 125,000 ($)2 and -127,500 ($)2 respectively. DMost of the volatility of the dollar value of the British asset can be removed by hedging exchange . risk because b2[Var(S)] and Var(e) are 125,000 ($)2 and -127,500 ($)2 respectively. Eun - Chapter 09 #37 Topic: Operating Exposure: Definition

38.

Which of the following would be an effective hedge? A. Sell £2,500 forward at the 1-year forward rate, F1($/£), that prevails at time zero. B. Buy £2,500 forward at the 1-year forward rate, F1($/£), that prevails at time zero. C. Sell £25,000 forward at the 1-year forward rate, F1($/£), that prevails at time zero. D. None of the above Eun - Chapter 09 #38 Topic: Operating Exposure: Definition

A U.S. firm holds an asset in Great Britain and faces the following scenario:

where, P* = Pound sterling price of the asset held by the U.S. firm P = Dollar price of the same asset Eun - Chapter 09

39.

The expected value of the investment in U.S. dollars is: A. $5,050 B. $3,700 C. $2,112.50 D. none of the above Eun - Chapter 09 #39 Topic: Operating Exposure: Definition

40.

The variance of the exchange rate is: A. 0.0200 B. 0.10 C. 0.002 D. none of the above Eun - Chapter 09 #40 Topic: Operating Exposure: Definition

41.

The "exposure" (i.e. the regression coefficient beta) is:

A. B. C. D.

7,500 2,5000 -2,500 none of the above Eun - Chapter 09 #41 Topic: Operating Exposure: Definition

42.

Which of the following conclusions are correct? AMost of the volatility of the dollar value of the British asset can be removed by hedging exchange . risk because b2[Var(S)] and Var(e) are 1,125,000 ($)2 and 2,500 ($)2 respectively. B Most of the volatility of the dollar value of the British asset cannot be removed by hedging exchange . risk because b2[Var(S)] and Var(e) are 236,717 ($)2 and 493,751 ($)2 respectively. C Most of the volatility of the dollar value of the British asset cannot be removed by hedging exchange . risk because b2[Var(S)] and Var(e) are 125,000 ($)2 and -127,500 ($)2 respectively. DMost of the volatility of the dollar value of the British asset can be removed by hedging exchange . risk because b2[Var(S)] and Var(e) are 125,000 ($)2 and -127,500 ($)2 respectively. Eun - Chapter 09 #42 Topic: Operating Exposure: Definition

43.

Which of the following would be an effective hedge? A. Sell £7,500 forward at the 1-year forward rate, F1($/£), that prevails at time zero. B. Buy £2,500 forward at the 1-year forward rate, F1($/£), that prevails at time zero. C. Sell £25,000 forward at the 1-year forward rate, F1($/£), that prevails at time zero. D. None of the above Eun - Chapter 09 #43 Topic: Operating Exposure: Definition

A U.S. firm holds an asset in Great Britain and faces the following scenario:

where, P* = Pound sterling price of the asset held by the U.S. firm P = Dollar price of the same asset Eun - Chapter 09

44.

The expected value of the investment in U.S. dollars is: A. $5,050 B. $4,500 C. $2,112.50 D. none of the above Eun - Chapter 09 #44 Topic: Operating Exposure: Definition

45.

The variance of the exchange rate is: A. 0.0200 B. 0.101875 C. 0.002 D. none of the above Eun - Chapter 09 #45 Topic: Operating Exposure: Definition

46.

The "exposure" (i.e. the regression coefficient beta) is:

A. B. C. D.

7,500 2,5000 -2,500 none of the above Eun - Chapter 09 #46 Topic: Operating Exposure: Definition

47.

Which of the following conclusions are correct? A Most of the volatility of the dollar value of the British asset can be removed by hedging exchange . risk because b2[Var(S)] and Var(e) are 0 ($)2 and 0 ($)2 respectively. B None of the volatility of the dollar value of the British asset can be removed by hedging exchange . risk because b2[Var(S)] and Var(e) are 0 ($)2 and 0 ($)2 respectively. C Most of the volatility of the dollar value of the British asset cannot be removed by hedging exchange . risk because b2[Var(S)] and Var(e) are 125,000 ($)2 and -127,500 ($)2 respectively. DMost of the volatility of the dollar value of the British asset can be removed by hedging exchange . risk because b2[Var(S)] and Var(e) are 125,000 ($)2 and -127,500 ($)2 respectively. Eun - Chapter 09 #47 Topic: Operating Exposure: Definition

48.

Which of the following would be an effective hedge? A. Sell £2,278.13 forward at the 1-year forward rate, F1($/£), that prevails at time zero. B. Buy £2,500 forward at the 1-year forward rate, F1($/£), that prevails at time zero. C. Sell £25,000 forward at the 1-year forward rate, F1($/£), that prevails at time zero. D. None of the above Eun - Chapter 09 #48 Topic: Operating Exposure: Definition

A U.S. firm holds an asset in Israel and faces the following scenario:

where, P* = Israeli shekel (IS) price of the asset held by the U.S. firm P = Dollar price of the same asset Eun - Chapter 09

49.

The expected value of the investment in U.S. dollars is: A. $2,083.33 B. $762.50 C. $6,250.00 D. $6,562.50 Eun - Chapter 09 #49 Topic: Operating Exposure: Definition

50.

The variance of the exchange rate is: A. 0.001968 B. 0.002969 C. 0.003968 D. 0.004968 Eun - Chapter 09 #50 Topic: Operating Exposure: Definition

51.

The "exposure" (i.e. the regression coefficient beta) is:

A. B. C. D.

-52.6316 1,289.80 12,898.00 none of the above Eun - Chapter 09 #51 Topic: Operating Exposure: Definition

52.

Which of the following conclusions are correct? AMost of the volatility of the dollar value of the Israeli asset can be removed by hedging exchange . risk because b2[Var(S)] and Var(e) are 236,717 ($)2 and 493,751 ($)2 respectively. B Most of the volatility of the dollar value of the Israeli asset cannot be removed by hedging exchange . risk because b2[Var(S)] and Var(e) are 236,717 ($)2 and 493,751 ($)2 respectively. CMost of the volatility of the dollar value of the Israeli asset cannot be removed by hedging exchange . risk because b2[Var(S)] and Var(e) are 8.22 ($)2 and 59,211 ($)2, respectively. DMost of the volatility of the dollar value of the Israeli asset can be removed by hedging exchange . risk because b2[Var(S)] and Var(e) are 8.22 ($)2 and 59,211 ($)2 respectively. Eun - Chapter 09 #52 Topic: Operating Exposure: Definition

53.

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 Eun - Chapter 09 #53 Topic: Operating Exposure: Definition

54.

Find an effective hedge financial hedge if a U.S. firm holds an asset in Great Britain and faces the following scenario:

P* = Pound sterling price of the asset held by the U.S. firm P = Dollar price of the same asset The CFO runs a regression of the form

The regression coefficient beta is calculated as Where

The variance of the exchange rate is calculated as: E(S) = 0.25 × $2.20 + 0.50 × $2.00 + 0.25 × $1.80 = $.55 + $1 + $.45 = $2.00 VAR(S) = 0.25($2.20 - $2.00)2 + 0.50($2.00 - $2.00)2 + 0.25($1.80 - $2.00)2 = 0.01 + 0 + 0.01 = 0.02 The expected value of the investment in U.S. dollars is: E[P] = 0.25 × $6,600 + 0.50 × $5,000 + 0.25 × $3,600 = $5,050 Which of the following is the most effective hedge financial hedge? A. Sell £7,500 forward at the 1-year forward rate, F1($/£), that prevails at time zero. B. Buy £7,500 forward at the 1-year forward rate, F1($/£), that prevails at time zero. C. Sell £2,500 forward at the 1-year forward rate, F1($/£), that prevails at time zero. D. 0.25 × £3,000 + 0.50 × £2,500 + 0.25 × £2,000 = £2,500 Eun - Chapter 09 #54 Topic: Operating Exposure: Definition

55.

Suppose that you implement your hedge from the last question at F1($/£) = $2/£. Your cash flows in state 1, 2, and 3 respectively will be A. $5,100, $5,000, $5,100. B. $5,100, $5,100, $5,100. C. $5,000, $5,000, $5,000. D. none of the above Eun - Chapter 09 #55 Topic: Operating Exposure: Definition

56.

A U.S. firm holds an asset in Great Britain and faces the following scenario:

Where P* = Pound sterling price of the asset held by the U.S. firm The CFO decides to hedge his exposure by selling forward the expected value of the pound denominated cash flow at F1($/£) = $2/£. As a result A. The firm's exposure to the exchange rate is made worse. B. He has a nearly perfect hedge. C. He has a perfect hedge. D. None of the above Eun - Chapter 09 #56 Topic: Operating Exposure: Definition

57.

A U.S. firm holds an asset in Italy and faces the following scenario:

Where P* = Euro price of the asset held by the U.S. firm The CFO decides to hedge his exposure by selling forward the expected value of the euro denominated cash flow at F1($/£) = $1.50/€. As a result A. the firm's exposure to the exchange rate is made worse. B. he has a nearly perfect hedge. C. he has a perfect hedge. D. none of the above Eun - Chapter 09 #57 Topic: Operating Exposure: Definition

58.

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.

Which 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. Eun - Chapter 09 #58 Topic: Operating Exposure: Definition

59.

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.

Which 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. Eun - Chapter 09 #59 Topic: Operating Exposure: Definition

60.

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.

Which 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. Eun - Chapter 09 #60 Topic: Operating Exposure: Definition

61.

Suppose a U.S. firm has an asset in Italy 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 asset (P*) as well as the future exchange rate (S) will be determined, depending on the realized state of the world.

Assume that you choose to "hedge" this asset by selling forward the expected value of the euro denominated cash flow at F1($/£) = $1.50/€. Calculate your cash flows in each of the possible states. A. $1,400, $1,400, $1,400 B. $1,496.6, $1,400, $1,306.40 C. $1,404, $1,404. $1,404 D. None of the above Eun - Chapter 09 #61 Topic: Operating Exposure: Definition

62.

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 Eun - Chapter 09 #62 Topic: Illustration of Operating Exposure

63.

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 Eun - Chapter 09 #63 Topic: Illustration of Operating Exposure

64.

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 Eun - Chapter 09 #64 Topic: Illustration of Operating Exposure

65.

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 Eun - Chapter 09 #65 Topic: Illustration of Operating Exposure

66.

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 Eun - Chapter 09 #66 Topic: Illustration of Operating Exposure

67.

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? AThe 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 Eun - Chapter 09 #67 Topic: Illustration of Operating Exposure

68.

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 Eun - Chapter 09 #68 Topic: Illustration of Operating Exposure

69.

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. Eun - Chapter 09 #69 Topic: Determinants of Operating Exposure

70.

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 Eun - Chapter 09 #70 Topic: Determinants of Operating Exposure

71.

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 Eun - Chapter 09 #71 Topic: Determinants of Operating Exposure

72.

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 Eun - Chapter 09 #72 Topic: Determinants of Operating Exposure

73.

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 Eun - Chapter 09 #73 Topic: Determinants of Operating Exposure

74.

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 Eun - Chapter 09 #74 Topic: Determinants of Operating Exposure

75.

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 Eun - Chapter 09 #75 Topic: Determinants of Operating Exposure

76.

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 Eun - Chapter 09 #76 Topic: Managing Operating Exposure

77.

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 Eun - Chapter 09 #77 Topic: Managing Operating Exposure

78.

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 Eun - Chapter 09 #78 Topic: Managing Operating Exposure

79.

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 Eun - Chapter 09 #79 Topic: Managing Operating Exposure

80.

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. Eun - Chapter 09 #80 Topic: Managing Operating Exposure

81.

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 Eun - Chapter 09 #81 Topic: Selecting Low-Cost Production Sites

82.

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 Eun - Chapter 09 #82 Topic: Selecting Low-Cost Production Sites

83.

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 Eun - Chapter 09 #83 Topic: Selecting Low-Cost Production Sites

84.

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 Eun - Chapter 09 #84 Topic: Selecting Low-Cost Production Sites

85.

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 Eun - Chapter 09 #85 Topic: Selecting Low-Cost Production Sites

86.

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. Eun - Chapter 09 #86 Topic: Flexible Sourcing Policy

87.

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. Eun - Chapter 09 #87 Topic: Flexible Sourcing Policy

88.

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. Eun - Chapter 09 #88 Topic: Flexible Sourcing Policy

89.

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 Eun - Chapter 09 #89 Topic: Diversification of the Market

90.

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. Eun - Chapter 09 #90 Topic: Diversification of the Market

91.

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. Eun - Chapter 09 #91 Topic: Financial Hedging Topic: R&D Efforts and Product Differentiation

92.

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 Eun - Chapter 09 #92 Topic: Financial Hedging Topic: R&D Efforts and Product Differentiation

93.

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 Eun - Chapter 09 #93 Topic: Financial Hedging Topic: R&D Efforts and Product Differentiation

94.

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 Eun - Chapter 09 #94 Topic: Financial Hedging Topic: R&D Efforts and Product Differentiation

95.

In the figure at right, label curves A and B respectively,

A. B. C. D.

unhedged, hedged. hedged, unhedged. normal, abnormal. none of the above Eun - Chapter 09 #95 Topic: Financial Hedging Topic: R&D Efforts and Product Differentiation

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. BR&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. Csuccessful 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 Eun - Chapter 09 #96 Topic: Financial Hedging Topic: R&D Efforts and Product Differentiation

97.

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 Eun - Chapter 09 #97 Topic: Financial Hedging Topic: R&D Efforts and Product Differentiation

Suppose that you hold a piece of land in the city of London that you may want to sell in one year. As a U.S. resident, you are concerned with the dollar value of the land. Assume that if the British economy booms in the future, the land will be worth £2,000, and one British pound will be worth $1.80. If the British economy slows down, on the other hand, the land will be worth less, say, £1,500, but the pound will be stronger, say, $2.20/£. You feel that the British economy will experience a boom with a 60 percent probability and a slowdown with a 40 percent probability. Eun - Chapter 09