161. Operational techniques include:
A. diversification of a company’s operations
B. purchasing of currency options
C. exposure netting
D. both A and C
Answer
D. both A and C
162. A(n) ___ hedge protects the company from adverse exchange rate movements but allow the company to benefit from favorable movements.
A. balance-sheet
B. forward market
C. money market
D. options market
Answer
D. options market
163. Which of the following are rules to use when choosing between forward contracts and currency options:
A. When the quantity of a foreign-currency cash outflow is known, buy the currency forward.
B. When the quantity of a foreign-currency cash outflow is unknown, buy the currency forward.
C. When the quantity of a foreign-currency cash flow is partially known and partially uncertain, use a forward contract to hedge the known and unknown portions.
D. When the quantity of a foreign-currency cash inflow is known, buy the currency forward.
Answer
A. When the quantity of a foreign-currency cash outflow is known, buy the currency forward.
164. An American firm has just bought merchandise from a British firm for £50,000 on terms of net 90 days. The U.S. company has purchased a 3-month call option of 50,000 pounds at a strike of $1.7 per pound and premium cost of $0.02 per pound. On the day the option matures, the spot exchange rate is $1.8 per pound. Should the U.S. company exercise the option at that time or buy British pounds in the spot market?
A. exercise the option
B. buys British pound spot
C. does not make any difference
D. cannot tell
Answer
A. exercise the option
165. Diz ltd. is a UK-based MNC with net cash inflows of euros and net cash inflows of Swiss francs. These two currencies are highly correlated in their movements against the dollar. Yanta ltd is a UK-based MNC that has the same level of net cash flows in these currencies as Diz ltd except that its euros represent net cash outflows. Which firm has a higher exposure to exchange rate risk?
A. Diz ltd
B. Yanta ltd
C. the firms have about the same level of exposure.
D. neither firm has any exposure.
Answer
A. Diz ltd
166. Subsidiary A of Mega plc has net inflows in Australian dollars of A$1,000,000, while Subsidiary B has net outflows in Australian dollars of A$1,500,000. The expected exchange rate of the Australian dollar is £0.30. What is the net inflow or outflow as measured in pounds?
A. £150,000 outflow.
B. £150,000 inflow
C. £1,666,000 inflow.
D. £1,666,000 outflow.
Answer
A. £150,000 outflow.
167. Assume zero transaction costs. If the 90-day forward rate of the euro is an accurate estimateof the spot rate 90 days from now, then the real cost of hedging payables will be:
A. positive.
B. negative.
C. positive if the forward rate exhibits a premium, and negative if the forward rate exhibits a discount.
D. zero.
Answer
D. zero.
168. Foghat Co. has 1,000,000 euros as receivables due in 30 days, and is certain that the euro will epreciate substantially over time. Assuming that the firm is correct, the ideal strategy is to:
A. sell euros forward.
B. write euro currency put options.
C. purchase euro currency call options.
D. purchase euros forward.
Answer
A. sell euros forward.
169. A ___ involves an exchange of currencies between two parties, with a promise to re- exchange currencies at a specified exchange rate and future date.
A. long-term forward contract
B. parallel loan
C. currency swap
D. money market hedge
Answer
C. currency swap
170. Assume that Parker Company will receive SF 200,000 in 360 days. Assume the following interest rates: UK Switzerland 360-day borrowing rate 7% 5% 360-day deposit rate 6% 4% Assume the forward rate of the Swiss franc is £0.44 and the spot rate of the Swiss franc is £0.42. If Parker Company uses a money market hedge, what equivalent amount could it receive in 360 days?
A. £101,904
B. £101,923
C. £88,769
D. £84,919
Answer
D. £84,919
171. Assume that Kramer Co. will receive SF 800,000 in 90 days. Today’s spot rate of the Swiss franc is £0.42, and the 90-day forward rate is £0.425. Kramer has developed the following probability distribution for the spot rate in 90 days: Possible Spot Rate in 90 Days Probability £0.41 10% £0.42 20% £0.43 40% £0.44 30% The probability that the forward hedge will result in more dollars received than not hedging is:
A. 10%.
B. 20%.
C. 30%.
D. 50%.
Answer
C. 30%.
172. Assume that Patton Co. will receive 100,000 New Zealand dollars (NZ$) in 180 days. Today’s spot rate of the NZ$ is £0.35, and the 180-day forward rate is £0.36. A call option on NZ$ exists, with an exercise price of £0.37, a premium of £0.01, and a 180-day expiration date. A put option on NZ$ exists with an exercise price of £0.36, a premium of £0.01, and a 180-day expiration date. Patton Co. has developed the following probability distribution for the spot rate in 180 days: Possible Spot Rate in 90 Days Probability £0.30 10% £0.35 60% £0.40 30% The probability that the forward hedge will result in more U.S. dollars received than the options hedge is ___ (deduct the amount paid for the premium when estimating the U.S. dollars received on the options hedge).
A. 10%
B. 30%
C. 40%
D. 70%
Answer
D. 70%
173. Which of the following is the least effective way of hedging transaction exposure in the long run?
A. long-term forward contract.
B. currency swap.
C. Parallel Loan
D. Money Market Hedge
Answer
D. Money Market Hedge
174. In a forward hedge, if the forward rate is an accurate predictor of the future spot rate, the real cost of hedging payables will be:
A. highly positive.
B. zero.
C. highly negative.
D. none of the above
Answer
B. zero.
175. With regard to hedging translation exposure, translation losses ___ ; and gains on forward contracts used to hedge translation exposure ___
A. are not tax deductible; are taxed
B. are not tax deductible; are not taxed
C. are tax deductible; are taxed
D. are tax deductible; are not taxed
Answer
A. are not tax deductible; are taxed
176. Assume a UK firm uses a forward contract to hedge all of its translation exposure. Also assume that the firm underestimated what its foreign earnings would be. Assume that the foreign currency depreciated over the year. The firm would generate a translation ___ , which would be ___ than the gain generated by the forward contract.
A. loss; smaller
B. gain; larger
C. loss; larger
D. gain; smaller
Answer
C. loss; larger
177. An effective way for an MNC to assess its economic exposure is to look at the firm’s:
A. income statement.
B. retained earnings.
C. liquidity.
D. level of stockholder’s equity.
Answer
A. income statement.
178. As opposed to transaction exposure, managing economic exposure involves developing a ___ solution.
A. short-term
B. immediate
C. long-term
D. none of the above
Answer
C. long-term
179. Spears Co. will receive SF1,000,000 in 30 days. Use the following information to determine the total dollar amount received (after accounting for the option premium) if the firm purchases and exercises a put option: Exercise price = $.61 Premium = $.02 Spot rate = $.60 Expected spot rate in 30 days = $.56 30 day forward rate = $.62
A. $630,000.
B. $610,000.
C. $600,000.
D. $590,000.
Answer
D. $590,000.
180. When the dollar strengthens, the reported consolidated earnings of U.S. based MNCs are ___ affected by translation exposure. When the dollar weakens, the reported consolidated earnings are ___ affected.
A. favorably; favorably affected but by a smaller degree
B. favorably; favorably affected by a higher degree
C. unfavorably; favorably affected
D. favorably; unfavorably affected
Answer
C. unfavorably; favorably affected
181. Which one of the following areas is NOT a way companies often respond to exchange raterisk when they alter their product strategy?
A. shifting the firm’s manufacturing base to another country
B. the timing of new-product introduction
C. changing the size of its product line
D. product innovation with advanced technology
Answer
C. changing the size of its product line
182. A perfect hedge (full coverage) on translation exposure can usually be achieved when:
A. using the money market hedge.
B. using the forward hedge.
C. using the futures hedge.
D. none of the above, since a perfect hedge is nearly impossible.
Answer
B. using the forward hedge.
183. A call option exists on British pounds with an exercise price of $1.60, a 90-day expiration date, and a premium of $.03 per unit. A put option exists on British pounds with an exercise price of $1.60, a 90-day expiration date, and a premium of $.02 per unit. You plan to purchase options to cover your future receivables of 700,000 pounds in 90 days. You will exercise the option in 90 days (if at all). You expect the spot rate of the pound to be $1.57 in 90 days. Determine the amount of dollars to be received, after deducting payment for the option premium. Choices:
A. $1,169,000.
B. $1,099,000.
C. $1,106,000.
D. $1,143,100.
Answer
C. $1,106,000.
184. If a firm based in the Netherlands wishes to avoid the risk of exchange rate movements, andis due to receive USD100,000 in 90 days, it could:
A. sell US dollars 90 days from now at the spot rate.
B. enter into a 90-day forward sale of US dollars for euros;
C. purchase US dollars 90 days from now at the spot rate;
D. enter into a 90-day forward purchase of US dollars for euros;
Answer
B. enter into a 90-day forward sale of US dollars for euros;
185. A forward currency transaction:
A. Sets the future date when delivery of a currency must be made at an unknown spot exchange rate
B. Calls for exchange in the future of currencies at an agreed rate of exchange
C. Means that delivery and payment must be made within one business day (USA/Canada) or two business days after the transaction date
D. Is always at a premium over the spot rate
Answer
B. Calls for exchange in the future of currencies at an agreed rate of exchange
186. Two important practical differences between the monetary/non-monetary method and thecurrent rate method of translation is found in their treatment of:
A. Fixed assets and owner’s equity
B. Issued share capital and retained earnings
C. Inventories and fixed assets
D. Monetary assets
Answer
C. Inventories and fixed assets
187. If the Indian subsidiary of a US firm has net exposed assets of Rp9,000,000 and the Indian rupee drops in value from Rp45.00/$ to Rp50.00/$, the US firm has a translation:
A. Loss of $25,000
B. Gain of $20,000
C. Loss of $20,000
D. Gain of $25,000
Answer
C. Loss of $20,000
188. If a UK parent is setting up a French subsidiary, and funds from the subsidiary will be periodically sent to the parent, the ideal situation from the parent’s perspective is a ___ after the subsidiary is established.
A. strengthening euro
B. stable euro
C. weak euro
D. B and C are both ideal.
Answer
A. strengthening euro
189. Assume the parent of a UK-based MNC plans to completely finance the establishment of its US subsidiary with existing funds from retained earnings in UK operations. According to the text, the discount rate used in the capital budgeting analysis on this project should be most affected by:
A. the cost of borrowing funds in the U.K.
B. the cost of borrowing funds in the U.S.
C. the parent’s cost of capital.
D. A and B
Answer
C. the parent’s cost of capital.
190. A firm considers an exporting project and will invoice the exports in pounds. The expected cash flows in pounds would be more difficult if the currency of the foreign country is ___
A. fixed
B. volatile
C. stable
D. none of the above, as the firm is not exposed
Answer
B. volatile
191. Other things being equal, firms from a particular home country will engage in more international acquisitions if they expect foreign currencies to ___ against their home currency, and if their cost of capital is relatively ___
A. appreciate; low
B. appreciate; high
C. depreciate; high
D. depreciate; low
Answer
A. appreciate; low
192. The impact of blocked funds on the net present value of a foreign project will be greater ifinterest rates are ___ in the host country and there are ___ investment opportunities in the host country.
A. very high; limited
B. very low; limited
C. very low; numerous.
D. very high; numerous
Answer
B. very low; limited
193. A French-based MNC has just established a subsidiary in Algeria. Shortly after the plant was built, the MNC determines that its exchange rate forecasts, which had previously indicated a slight appreciation in the Algerian dinar were probably false. Instead of a slight appreciation, the MNC now expects that the dinar will depreciate substantially due to political turmoil in Algeria. This new development would likely cause the MNC to ___ its estimate of the previously computed net present value.
A. lower
B. increase
C. lower, but not necessarily if the MNC invests enough in Algeria to offset the decrease in NPV
D. increase, but not necessarily if the MNC reduces its investment in Algeria by an offsetting amount
Answer
A. lower
194. Assume that Baps Corporation is considering the establishment of a subsidiary in Norway. The initial investment required by the parent is $5,000,000. If the project is undertaken, Baps would terminate the project after four years. Baps’ cost of capital is 13%, and the project is of the same risk as Baps’ existing projects. All cash flows generated from the project will be remitted to the parent at the end of each year. Listed below are the estimated cash flows the Norwegian subsidiary will generate over the project’s lifetime in Norwegian kroner (NOK): Year 1 Year 2 Year 3 Year 4 NOK 10,000,000 NOK 15,000,000 NOK 17,000,000 NOK 20,000,000 The current exchange rate of the Norwegian kroner is $.135. Baps’ exchange rate forecast for the Norwegian kroner over the project’s lifetime is listed below: Year 1 Year 2 Year 3 Year 4 $.13 $.14 $.12 $.15 Baps is also uncertain regarding the cost of capital. Recently, Norway has been involved in some political turmoil. What is the net
A. -$17,602.62.
B. $8,000,000.
C. $1,048,829.
D. $645,147.
Answer
D. $645,147.
195. When a foreign subsidiary is not wholly owned by the parent and a foreign project is partially
A. financed with retained earnings of the parent and of the subsidiary, then:
B. the parent’s perspective should be used to evaluate a foreign project.
C. the subsidiary’s perspective should be used to evaluate a foreign project.
D. the foreign project should enhance the value of both the parent and the subsidiary.
Answer
C. the subsidiary’s perspective should be used to evaluate a foreign project.
196. An international project’s NPV is ___ related to the size of the initialinvestment and ___ related to the project’s required rate of return.
A. positively; positively
B. positive; negatively
C. negatively; positively
D. negatively; negatively
Answer
D. negatively; negatively
197. A foreign project generates a negative cash flow in year 1 and positive cash flows in years 2 through 5. The NPV for this project will be higher if the foreign currency ___ in year 1 and ___ in years 2 though 5.
A. depreciates; depreciates
B. appreciates; appreciates
C. depreciates; appreciates
D. appreciates; depreciates
Answer
C. depreciates; appreciates
198. If an MNC sells a product in a foreign country and imports partially manufactured components needed for production to that country from the U.S., then the local economy’s inflation will have:
A. a more pronounced impact on revenues than on costs.
B. a less pronounced impact on revenues than on costs.
C. the same impact on revenues as on costs.
D. none of the above
Answer
A. a more pronounced impact on revenues than on costs.
199. Which of the following is not true regarding a target’s previous cash flows?
A. They may serve as an initial base from which future cash flows may be estimated after accounting for other factors.
B. It may be easier to estimate the cash flows to be generated by a target than to estimate the cash flows to be generated from a new foreign subsidiary.
C. They are always good indicators of future cash flows.
D. All of the above are true.
Answer
C. They are always good indicators of future cash flows.
200. Which of the following would probably not cause the stock price of a foreign target todecrease?
A. Its expected cash flows decline.
B. General stock market conditions in the foreign country are deteriorating.
C. Investors anticipate that the target will be acquir
Answer
C. Investors anticipate that the target will be acquir
