Multiple choice questions
Question 1. An exporter faced with exposure to a depreciating currency can reduce transaction exposure with a strategy of: paying or collecting early.
paying or collecting late.
paying late, and collecting early.
paying early, and collecting late.
Question 2. A U.S.-based MNC with exposure to the Swedish krona could best cross-hedge with:
forward contracts on the euro.
forward contracts on the ruble.
forward contracts on the pound.
forward contracts on the yen.
Question 3. The underlying principle of the temporal method is:
assets and liabilities should be translated based on their maturity.
monetary balance sheet accounts should be translated at the spot rate; nonmonetary accounts are translated at the historical rate in effect when the account was first recorded.
monetary accounts are translated at the current exchange rate; other accounts are translated at the current exchange rate if they are carried on the books at current value; items carried at historical cost are translated at historic exchange rates.
all balance sheet accounts are translated at the current exchange rate, except stockholder equity.
Question 4.Translation exposure, also frequently called accounting exposure, refers to the effect that an unanticipated change in exchange rates will have on the:
choice of accounting methodology.
consolidated financial reports of a MNC.
firm's competitive position.
cash flows realized from foreign operations.
Question 5. When exchange rates change:
U.S. firms that produce domestically and sell only to domestic customers will be unaffected.
U.S. firms that produce domestically and sell only to domestic customers can be affected if they compete against imports.
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.
both a) and b).
Question 6.Exchange rate risk of a foreign currency payable is an example of:
transaction exposure.
translation exposure.
economic exposure.
none of the above.
Question 7.Economic exposure refers to:
the sensitivity of realized domestic currency values of the firm's contractual cash flows denominated in foreign currencies to unexpected exchange rate changes.
the extent to which the value of the firm would be affected by unanticipated changes in exchange rate.
the potential that the firm's consolidated financial statement can be affected by changes in exchange rates.
ex post and ex ante currency exposures.
Question 8.When exchange rates change:
the value of a foreign subsidiary's foreign currency denominated assets and liabilities change to new numbers still denominated in the foreign currency.
the value of a foreign subsidiary's foreign currency denominated assets and liabilities change when re-denominated into the home currency.
hedging should be done after the change.
none of the above.
Question 9.The recognized methods for consolidating the financial reports of an MNC are:
short/long term method, current/future method, flexible/inflexible method, and economic/noneconomic method.
current/noncurrent method, monetary/nonmonetary method, short/long term method, and current/future method.
current/noncurrent method, monetary/nonmonetary method, temporal method, and current rate method.
temporal method, current rate method, flexible/inflexible method, and economic/noneconomic method.
Question 10.If you owe a foreign currency denominated debt, you can hedge with:
a long position in a currency forward contract.
a long position in an exchange-traded futures option.
buying the foreign currency today and investing it in the foreign county.
both a) and c).