Depreciation of the euro relative to the U.S. dollar will cause a U.S.-based mul

Question

Depreciation of the euro relative to the U.S. dollar will cause a U.S.-based multinational firm's reported earnings (from the consolidated income statement) to ____. If a firm desired to protect against this possibility, it could stabilize its reported earnings by ____ euros forward in the foreign exchange market. a. be reduced; purchasing b. be reduced; selling c. increase; selling d. increase; purchasing



2. Springfield Co., based in the U.S., has a cost from orders of foreign material that exceeds its foreign revenue. All foreign transactions are denominated in the foreign currency of concern. This firm would ____ a stronger dollar and would ____ a weaker dollar. a. benefit from; be unaffected by b. benefit from; be adversely affected by c. be unaffected by; be adversely affected by d. be unaffected by; benefit from e. benefit from; benefit from



3. Whitewater Co. is a U.S. company with sales to Canada amounting to C$8 million. Its cost of materials attributable to the purchase of Canadian goods is C$6 million. Its interest expense on Canadian loans is C$4 million. Given these exact figures above, the dollar value of Whitewater's "earnings before interest and taxes" would ____ if the Canadian dollar appreciates; the dollar value of Whitewater's cash flows would ____ if the Canadian dollar appreciates. a. increase; increase b. decrease; increase c. decrease; decrease d. increase; decrease e. increase; be unaffected



4. Sycamore (a U.S. firm) has no subsidiaries and presently has sales to Mexican customers amounting to MXP98 million, while its peso-denominated expenses amount to MXP41 million. If it shifts its material orders from its Mexican suppliers to U.S. suppliers, it could reduce peso-denominated expenses by MXP12 million and increase dollar-denominated expenses by $800,000. This strategy would ____ the Sycamore's exposure to changes in the peso's movements against the U.S. dollar. Regardless of whether the firm shifts expenses, it is likely to perform better when the peso is valued ____ relative to the dollar. a. reduce; high b. reduce; low c. increase; low d. increase; high

  


5. Rockford Co. is a U.S. manufacturing firm that produces goods in the U.S. and sells all products to retail stores in the U.K.; the goods are denominated in pounds. It finances a small portion of its business with pound-denominated loans from British banks. Which of the following is true? (Assume that the amount of products to be sold is guaranteed by contracts.) a. The dollar value of sales is higher if the pound depreciates against the dollar. b. The dollar value of sales is unaffected by the pound's exchange rate. c. A and B d. None of the above



6. If a U.S. firm's expenses are more susceptible to exchange rate movements than revenue, the firm will ____ if the dollar ____. a. benefit; weakens b. be unaffected; weakens c. be unaffected; strengthens d. benefit; strengthens



7. Laketown Co. has some expenses and revenue in euros. If its expenses are more sensitive to exchange rate movements than revenue, it could reduce economic exposure by ____. If its revenues are more sensitive than expenses, it could reduce economic exposure by ____. a. decreasing foreign revenues; decreasing foreign expenses b. decreasing foreign revenues; increasing foreign expenses c. increasing foreign revenues; decreasing foreign revenues d. decreasing foreign expenses; increasing foreign revenues



8. Any restructuring of operations that ____ the difference between a foreign currency's inflows and outflows may ____ economic exposure. a. reduces; increase b. increases; reduce c. reduces; reduce d. A and B e. none of the above






9. If a firm does not have foreign subsidiaries, it is not subject to ____. a. transaction exposure b. economic exposure c. A and B d. translation exposure



10. If the Singapore dollar appreciates against the U.S. dollar over this year, the consolidated earnings of a U.S. company with a subsidiary in Singapore will be ____ as a result of the exchange rate movement. a. negative b. adversely affected c. favorably affected d. unaffected



11. Assume a U.S. 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. loss; larger c. gain; larger d. gain; smaller



12. 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.



13. Assume that a Japanese car manufacturer exports cars to U.S. dealerships, which are priced in yen. The demand for those cars declines when the yen is strong. The manufacturer also produces some cars in the U.S. with U.S. materials and those cars are priced in dollars. The manufacturer could reduce its economic exposure by: a. closing down most of its plants in the U.S. b. producing more automobiles in the U.S. c. relying completely on Japanese suppliers for its parts. d. pricing its exports in dollars.



14. Wisconsin Inc. conducts business in Zambia. Years ago, Wisconsin established a subsidiary in Zambia that has consistently generated very large profits denominated in Zambian kwacha. Wisconsin wishes to restructure its operations to reduce economic exposure. Which of the following is not a feasible way of accomplishing this? a. increase Zambian supply orders. b. increase Zambian sales. c. restructure debt to increase debt payments in Zambia.
d. reduce Zambian sales.



15. Which of the following firms is not exposed to translation exposure? a. Firm X, with a fully owned subsidiary that periodically remits earnings generated in Great Britain to the U.S.-based parent. b. Firm Y, with a fully owned subsidiary that periodically generates foreign losses in Sweden. The parent covers at least some of these losses. c. Firm Z, with a fully owned subsidiary that generates substantial earnings in Germany. The subsidiary never remits earnings but reinvests them in Germany. d. All of the above firms are exposed to translation exposure.



16. ____ represents any impact of exchange rate fluctuations on a firm's future cash flows. a. Translation exposure b. Economic exposure c. Transaction exposure d. None of the above



17. An effective way for an MNC to assess its economic exposure is to review the firm's: a. income statement. b. liquidity. c. retained earnings. d. level of stockholders' equity.

  


18. Managing economic exposure is generally perceived to be ____ managing transaction exposure. a. more difficult than b. less difficult than c. just as difficult as d. none of the above



19. As opposed to transaction exposure, managing economic exposure involves developing a(n) ____ solution. a. short-term b. long-term c. immediate  

  


20. Assume that an MNC's cash flows are positively related to the movements in a foreign currency. If the MNC expects the foreign currency to weaken, it could purchase the currency forward to reduce its degree of economic exposure. a. True b. False


21. An MNC is attempting to reduce its economic exposure by financing a portion of its business with loans in the foreign currency. If the foreign currency weakens, the MNC will need ____ of the foreign currency to cover the loan payment, while the MNC's foreign currency revenues will convert to ____ dollars. a. more; fewer b. more; more c. less; fewer d. less; more







22. Based on the text, it should be obvious that markets are ____ in reality, and consequently, monopolistic advantages ____ be exploited. a. perfect; may possibly b. perfect; cannot c. imperfect; may possibly d. imperfect; cannot



23. When a firm analyzes the feasibility of a project, it should consider the: a. variability of the project's cash flow. b. correlation of the project's cash flow relative to the prevailing cash flows of the MNC. c. A and B d. none of the above



24. The ____ a project's variability in cash flows, and the ____ the positive correlation between the project's cash flow and the MNC's cash flow, the lower the risk of the project. a. higher; higher b. higher; lower c. lower; lower d. lower; higher

25. The most important cost-related motive for direct foreign investment is diversification across product markets. a. True b. False












26. Subsidiary A of Mega Corporation 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 $.55. What the net inflow or outflow is as measured in U.S. dollars?














27. Dubas Co. is a U.S.-based MNC that has a subsidiary in Germany and another subsidiary in Greece. Both subsidiaries frequently remit their earnings back to the parent company. The German subsidiary generated a net outflow of €2,000,000 this year, while the Greek subsidiary generated a net inflow of €1,500,000. What is the net inflow or outflow as measured in U.S. dollars this year? The exchange rate for the euro is $1.05.












28. Treck Co. expects to pay €200,000 in one month for its imports from Greece. It also expects to receive €250,000 for its exports to Italy in one month. Treck Co. estimates the standard deviation of monthly percentage changes of the euro to be 3 percent over the last 40 months. Assume that these percentage changes are normally distributed. Using the value-at-risk (VAR) method based on a 95% confidence level, what is the maximum one-month loss in dollars if the expected percentage change of the euro during next month is 2%? Assume that the current spot rate of the euro (before considering the maximum one-month loss) is $1.23.

Explanation / Answer

Only allowed to answer 4

a be reduced, purchasing
b benefit from stronger dollar, adversely affected by weaker dollar
b decrease increase
b reduce low

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