1) ________ exposure deals with cash flows that result from existing contractual obligations.
2) ________ exposure measures the change in the present value of the firm resulting fromunexpected changes in exchange rates.
3) Each of the following is another name for operating exposure EXCEPT ________.
C) accounting exposure
Transaction exposure and operating exposure exist because of unexpected changes in futurecash flows. The difference between the two is that ________ exposure deals with cash flowsalready contracted for, while ________ exposure deals with future cash flows that might changebecause of changes in exchange rates.
) transaction; operating
5) ________ exposure is the potential for accounting-derived changes in owner's equity to occurbecause of the need to translate foreign currency financial statements into a single reportingcurrency.
D) Accounting (aka translation)
6) Losses from ________ exposure generally reduce taxable income in the year they are realized.________ exposure losses may reduce taxes over a series of years.
C) transaction; Operating
7) Losses from ________ exposure generally reduce taxable income in the year they are realized.________ exposure losses are not cash losses and therefore, are not tax deductible.
D) transaction; Translation
1) As a generalized rule, only realized foreign exchange losses are deductible for tax purposes.
Many MNE s manage foreign exchange exposure centrally, thus gains or losses are alwaysmatched with the country of origin.
MNE cash flows may be sensitive to changes in which of the following?
A) Exchange rates.
B) Interest rates.
C) Commodity prices.
D) all of the aboveAnswer: D
2) Assuming no transaction costs (i.e., hedging is "free"), hedging currency exposures should________ the variability of expected cash flows to a firm and at the same time, the expectedvalue of the cash flows should ________.
B) decrease; not change
3) Which of the following is NOT cited as a good reason for hedging currency exposures?
C) Currency risk management increases the expected cash flows to the firm.
4) Which of the following is cited as a good reason for NOT hedging currency exposures?
D) All of the above are cited as reasons NOT to hedge.
Hedging, or reducing risk, is the same as adding value or return to the firm.
There is considerable question among investors and managers about whether hedging is agood and necessary tool.
The key arguments in opposition to currency hedging such as market efficiency, agencytheory, and diversification do not have financial theory at their core.
The stages in the life of a transaction exposure can be broken into three distinct time periods.The first time period is the time between quoting a price and reaching an actual sale agreementor contract. The next time period is the time lag between taking an order and actually filling ordelivering it. Finally, the time it takes to get paid after delivering the product. In order, thesestages of transaction exposure may be identified as
quotation, backlog, and billing exposure.
A U.S. firm sells merchandise today to a British company for £100,000. The currentexchange rate is $2.03/£ , the account is payable in three months, and the firm chooses to avoidany hedging techniques designed to reduce or eliminate the risk of changes in the exchange rate.The U.S. firm is at risk today of a loss if
A) the exchange rate changes to $2.00/£.
B) the exchange rate changes to $2.05/£.
C) the exchange rate doesn't change.
D) all of the above
A U.S. firm sells merchandise today to a British company for £100,000. The currentexchange rate is $2.03/£, the account is payable in three months, and the firm chooses to avoidany hedging techniques designed to reduce or eliminate the risk of changes in the exchange rate.If the exchange rate changes to $2.05/£ the U.S. firm will realize a ________ of ________.
B) gain; $2000
A U.S. firm sells merchandise today to a British company for £100,000. The currentexchange rate is $2.03/£, the account is payable in three months, and the firm chooses to avoidany hedging techniques designed to reduce or eliminate the risk of changes in the exchange rate.If the exchange rate changes to $2.01/£ the U.S. firm will realize a ________ of ________.
A) loss; $2,000
5) ________ is NOT a commonly used contractual hedge against foreign exchange transactionexposure.
A) Forward market hedge
B) Money market hedge
C) Options market hedge
D) All of the above are contractual hedges.
A ________ hedge refers to an offsetting operating cash flow such as a payable arising fromthe conduct of business.
The structure of a money market hedge is similar to a forward hedge. The difference is thecost of the money market hedge is determined by the differential interest rates, while the forwardhedge is a function of the forward rates quotation.
In efficient markets, interest rate parity should assure that the costs of a forward hedge andmoney market hedge should be approximately the same.
When attempting to manage an account payable denominated in a foreign currency, the firm'sonly choice is to remain unhedged.
________ are transactions for which there are, at present, no contracts or agreements betweenparties.
C) Anticipated exposure
According to a survey by Bank of America, the type of foreign exchange risk most oftenhedged by firms is ________.
B) transaction exposure
According to a survey by Bank of America, when firms do hedge, the most common type ofhedging instruments are ________.
The treasury function of most firms, the group typically responsible for transaction exposuremanagement, is NOT usually considered a profit center.
According to the authors, firms that employ proportional hedges increase the percentage offorward-cover as the maturity of the exposure lengthens.
1) Another name for operating exposure is ________ exposure.
D) all of the above
What type of international risk exposure measures the change in present value of a firmresulting from changes in future operating cash flows caused by any unexpected change inexchange rates?
C) Operating exposure.
________ cash flows arise from intracompany and intercompany receivables and paymentswhile ________ cash flows are payments for the use of loans and equity.
B) Operating; financing
4) Which of the following is NOT an example of a financial cash flow?
Payment for goods and services
5) Which of the following is NOT an example of an operating cash flow?
D) Dividend paid to parent company.
6) ________ exposure is far more important for the long-run health of a business than changescaused by ________ or ________ exposure.
A) Operating; translation; transaction
7) Simpson Sign Company based in Frostbite Falls, Minnesota has a 6-month C$100,000contract to complete sign work in Winnipeg, Manitoba, Canada. The current spot rate is$1.02/C$ and the forward rate is $1.01/C$. Under conditions of equilibrium, management woulduse today ________ when preparing operating budgets.
The goal of operating exposure analysis is to identify strategic operating techniques the firmmight adopt to enhance value in the face of unanticipated exchange rate changes.
Operating cash flows may occur in different currencies and at different times, but financingcash flows may occur only in a single currency.
Expected changes in foreign exchange rates should already be factored into anticipatedoperating results by management and investors.
Which of the following is NOT an example of diversifying operations?
C) Raising funds in more than one country.
2) Which of the following is NOT an example of diversification in financing?
When disequilibria in international markets occur, management can take advantage by
A) doing nothing if they are already diversified and able to realize beneficial portfolio effects.B) recognizing disequilibria faster than purely domestic competitors.
C) shifting operational of financing activities to take advantage of the disequilibria.
D) all of the above
Purely domestic firms will be at a disadvantage to MNEs in the event of market disequilibriabecause
domestic firms lack comparative data from its own sources.
Which of the following is probably NOT an advantage of foreign exchange risk management?
A) The reduction of the variability of cash flows due to domestic business cycles.
B) Increased availability of capital.
C) Reduced cost of capital.
D) All of the above are potential advantages of foreign exchange risk management.Answer: D
Which of the following is NOT an example of a form of political risk that might be avoided orreduced by foreign exchange risk management?
Destruction of raw materials through natural disaster.
Management must be able to predict disequilibria in international markets to take advantage ofdiversification strategies.
Which of the following is NOT identified by your authors as a proactive managementtechnique to reduce exposure to foreign exchange risk?
C) Remaining a purely domestic firm.
2) Which one of the following management techniques is likely to best offset the risk of long-runexposure to receivables denominated in a particular foreign currency?
A) Borrow money in the foreign currency in question.
Which one of the following management techniques is likely to best offset the risk of long-runexposure to payables denominated in a particular foreign currency?
B) Lend money in the foreign currency in question.
The particular strategy of trying to offset stable inflows of cash from one country withoutflows of cash in the same currency is known as ________.
Which of the following is NOT an acceptable hedging technique to reduce risk caused by arelatively predictable long-term foreign currency inflow of Japanese yen?
Import raw materials from Japan denominated in dollars.
6) An MNE has a contract for a relatively predictable long-term inflow of Japanese yen that thefirm chooses to hedge by seeking out potential suppliers in Japan. This hedging strategy isreferred to as ________.
A) a natural hedge.
An MNE has a contract for a relatively predictable long-term inflow of Japanese yen that thefirm chooses to hedge by paying for imports from Canada in Japanese yen. This hedging strategyis known as ________.
A U.S. timber products firm has a long-term contract to import unprocessed logs fromCanada. To avoid occasional and unpredictable changes in the exchange rate between the U.S.dollar and the Canadian dollar, the firms agree to split between the two firms the impact of anyexchange rate movement. This type of agreement is referred to as ________.
A ________ occurs when two business firms in separate countries arrange to borrow eachother's currency for a specified period of time.
D) back-to-back loan
10) A Canadian firm with a U.S. subsidiary and a U.S. firm with a Canadian subsidiary agree toa parallel loan agreement. In such an agreement, the Canadian firm is making a/an ________loan to the ________ subsidiary while effectively financing the ________ subsidiary.
C) direct; U.S.; Canadian
Which of the following is NOT an important impediment to widespread use of parallelloans?
C) The process does not avoid exchange rate risk.
A ________ resembles a back-to-back loan except that it does not appear on a firm's balancesheet.
D) currency swap
A ________ is the term used to describe a foreign currency agreement between two parties toexchange a given amount of one currency for another, and after a period of time, to give back theoriginal amounts.
B) currency swap
A British firm and a U.S. Corporation each wish to enter into a currency swap hedgingagreement. The British firm is receiving U.S. dollars from sales in the U.S. but wants pounds.The U.S. firm is receiving pounds from sales in Britain but wants dollars. Which of the followingchoices would best satisfy the desires of the firms?
A) The British firm pays dollars to a swap dealer and receives pounds from the dealer. The U.S.firm pays pounds to the swap dealer and receives dollars.
Reinvoicing centers provide the following benefits:
A) Aid in the management of foreign exchange exposure.B) Effectively guarantee the exchange rate for future orders.C) Help manage intra-subsidiary cash flows.
D) all of the above
Which of the following is NOT seen as a potential disadvantage to the formation of an intra-company reinvoicing center?
Reinvoicing center personnel may develop expertise in the selection and implementation offoreign exchange hedging techniques.
Currency swaps are exclusively for periods of time under one year.
Most swap dealers arrange swaps so that each firm that is a party to the transaction does notknow who the counterparty is.
Most swap dealers arrange swaps so that each firm that is a party to the transaction knowswho the counterparty is.
Swap agreements are treated as off-balance sheet transactions via U.S. accounting methods.
Swap agreements are treated as line items on the balance sheet via U.S. accounting methods.
After being introduced in the 1980s, currency swaps have remained a relatively insignificantfinancial derivative instrument.
After being introduced in the 1980s, currency swaps have gained increasing importance asfinancial derivative instruments.
Intracompany leads and lags are generally more feasible than comparable intercompanyactivities because the favorable impact of the lead or lag for one company is the reverse for theother firm.
The empirical evidence strongly supports the proposition that contractual hedges caneffectively eliminate operating exposure.
Beta may be defined as
A) the measure of systematic risk.
B) a risk measure of a portfolio.
C) the ratio of the variance of the portfolio to the variance of the market.D) all of the above
________ risk is measured with beta.
A fully diversified domestic portfolio has a beta of ________.
C) can be diversified away.
5) A well-diversified portfolio has about ________ of the risk of the typical individual stock.
An internationally diversified portfolio
D) all of the above
In some respects, internationally diversified portfolios are the same in principle as a domesticportfolio because
C) investors are trying to reduce the total risk of the portfolio.
In some respects, internationally diversified portfolios are different from a domestic portfoliobecause
A) investors may also acquire foreign exchange risk.
A U.S. investor makes an investment in Britain and earns 14% on the investment while theBritish pound appreciates against the U.S. dollar by 8%. What is the investor's total return?
Which of the following statements is NOT true?
A) International diversification benefits induce investors to demand foreign securities.
B) An international security adds value to a portfolio if it reduces risk without reducing return.C) Investors will demand a security that adds value.
D) All of the above are true.
Portfolio diversification can eliminate 100% of risk.
Increasing the number of securities in a portfolio reduces the unsystematic risk but not thesystematic risk.
Portfolio theory assumes that investors are risk-averse. This means that investors
will accept some risk, but not unnecessary risk.
The efficient frontier of the domestic portfolio opportunity set
A) runs along the extreme left edge of the opportunity set.
B) represents optimal portfolios of securities that represent minimum risk for a given level ofexpected portfolio return.
C) contains the portfolio of risky securities that the logical investor would choose to hold.
D) all of the above
The addition of foreign securities to the domestic portfolio opportunity set shifts the efficientfrontier
C) up and to the left.
Relative to the efficient frontier of risky portfolios, it is impossible to hold a portfolio that islocated ________ the efficient frontier.
A) to the left of
5) The ________ connects the risk-free security with the optimal domestic portfolio.
C) capital market line
The graph for the efficient frontier has beta on the vertical axis and standard deviation of thehorizontal axis.
The portfolio with the least risk among all those possible in the domestic portfolio opportunityset is called the minimum risk domestic portfolio.
The optimal domestic portfolio of risky securities is the portfolio of minimum risk.
The standard deviation of a portfolio is the weighted average standard deviations of theindividual assets.
The Sharpe measure uses ________ as the measure of risk and the Treynor measure uses________ as the measure of risk.
C) standard deviation; beta
The Sharpe and Treynor Measures tend to be consistent in their ranking of portfolios when theportfolios
B) are properly diversified.
The Sharpe and Treynor measures are each measures of return per unit of risk.
Capital markets around the world are on average less integrated today than they were 20 yearsago.
The issue of ethics in the reporting of income and the payment of taxes is a considerable one.The authors state that most MNEs operating in foreign countries tend to follow the generalprinciple of
B) full disclosure to the tax authorities.
Which of the following is an unlikely objective of U.S. government policy for the taxation offoreign MNEs?
A) to raise revenues
B) to provide an incentive for U.S. private investment in developing countries
C) to improve the U.S. balance of paymentsD) All of the above are objectives.
A ________ tax policy is one that has no impact on private decision-making, while a________ policy is designed to encourage specific behavior.
C) neutral; tax incentive
Which of the following is NOT an example of a tax incentive policy.
A) The federal government gives a tax credit to MNEs that make domestic capital improvementsbut not foreign capital improvements.
B) Corporations are allowed to take a direct tax credit for each dollar of matching donations theymake to institutions of higher education.
C) A tax law is passed that makes interest on property non tax-deductible, but interest paymentson durable goods are.
D) All are examples of a tax incentive policy.
Toyota Motor Company operates in many different countries and pays taxes at many differentrates. However, they always pay the same rate as their local competitors. General Motors isoperating in an environment of ________ tax policy.
B) foreign neutrality
The United States taxes the domestic and remitted foreign earnings of U.S. based MNEs nomatter where the earnings occurred. This is an example of a ________ approach to levying taxes.
The United States taxes all earnings on U.S. soil by both domestic and foreign firms. This isan example of a ________ approach to levying taxes.
The territorial approach to taxation policy is also termed the ________ approach.
A tax that is effectively a sales tax at each stage of production is defined as a/an ________tax.
C) value-added tax
What is the total value of taxes paid in the following example if the value added tax is 10%?A farmer raises wheat that he sells for $1.50 to the grain company. The grain company sells tothe processor for $2.00 per bushel. The processor turns the wheat into a breakfast cereal andwholesales it for $3.00 per bushel. The retailer sells the cereal for $4.00 per bushel.
The primary objective of multinational tax planning is to minimize the firm's worldwide taxburden.
A country CANNOT have both a territorial and a worldwide approach as a national tax policy.
Tax treaties generally have the effect of increasing the withholding taxes between thecountries that are negotiating the treaties.
A value-added tax has gained widespread usage in Western Europe, Canada, and parts ofLatin America.
All indications are that the value-added tax will soon be the dominant form of taxation in theU.S.
Among the G7 nations, the U.S. has a below average corporate income tax rate that makes itattractive for other countries to invest in the U.S.
In the mid 1980s the U.S. led the way to higher corporate income tax rates worldwide. Today,most of the G7 nations have surpassed the U.S. and have higher corporate income tax rates thanthe U.S.
A tax that is a form of social redistribution of income is defined as a/an ________ tax.
A ________ is a direct reduction of taxes whereas a ________ reduces the taxable incomebefore taxes.
C) tax credit; tax deduction
Tax treaties typically result in ________ between the two countries in question.
D) reduced withholding tax rates
Transfer pricing is a strategy that may be used by MNEs to
A) reduce consolidated corporate income taxes.
B) partially finance a subsidiary in another country.
C) transfer funds from a subsidiary to the parent corporation.D) all of the above
9) ________ is the pricing of goods, services, and technology between related companies.
C) Transfer pricing
Tax credits are less valuable on a dollar-for-dollar basis than are tax-deductible expenses.
The U.S. Internal Revenue Service can reallocate revenues and expenses between parentcorporations and their subsidiaries to more clearly reflect a proper allocation of income. In suchinstances it is the responsibility of the corporation to prove that the IRS has been arbitrary in itsdecision-making, thus establishing a "guilty until proved innocent" tax approach.
Tax haven subsidiaries are typically established in a country that can meet which of thefollowing requirements?
Tax haven countries have all of the above characteristics.
Tax haven subsidiaries of MNEs are categorically referred to as international offshorefinancial centers.