1. Either the translation gain (or loss) or the gain (or loss) resulting from a hedge strategy is a real gain (or loss).
a. True
b. False
2. If a firm does not have foreign subsidiaries, it is not subject to ______.
a. transaction exposure
b. economic exposure
c. translation exposure
d. A and B
e. A and C
3. A U.S. company with sales to Canada amounting to C$6 million. Its cost of materials attributable to the purchase of Canadian goods is C$8 million. Its interest expense on Canadian loans is C$2 million. Given these exact figures above, the dollar value of its "earnings before interest and taxes" would ____ if the Canadian dollar appreciates; the dollar value of its cash flows would ____ if the Canadian dollar appreciates.
a. increase; increase
b. decrease; increase
c. decrease; decrease
d. increase; decrease
4. Appreciation of the euro relative to the U.S. dollar will cause this 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
5. Which of the following statements is incorrect?
a. Transaction exposure represents only the exchange rate risk when converting net foreign cash inflows to U.S. dollars or when purchasing foreign currencies to send payments.
b. Economic exposure represents any impact of exchange rate fluctuations on a firm's future cash flows.
c. Firms can simply focus on hedging their foreign currency payables and/or receivables to hedge economic exposure.
d. The management of economic exposure tends to serve as a long-term solution rather than just a short-term solution.
6. Which of the following is an example of economic exposure but not an example of transaction exposure?
a) A decrease in the dollar’s value benefits a U.S. firm’s domestic sales because foreign competitors’ sales to U.S. customers might decrease.
b) an increase in the pound’s value increases the U.S. firm’s cost of British pound payables.
c) a decrease in the peso’s value decreases a U.S. firm’s dollar value of peso receivables.
d) a decrease in the Swiss franc’s value decreases the dollar value of interest payments on a Swiss deposit sent to a U.S. firm by a Swiss bank.