Assignment 2 Flashcards
Q1) Transaction exposure is defined as
A) the extent to which the value of the firm would be affected by unanticipated changes in exchange rate.
B) the sensitivity of realized domestic currency values of the firm’s contractual cash flows denominated in foreign currencies to unexpected exchange rate changes.
C) ex post and ex ante currency exposures.
D) the potential that the firm’s consolidated financial statement can be affected by changes in exchange rates.
1) B
Q2) The most direct and popular way of hedging transaction exposure is by
A) currency forward contracts.
B) exchange-traded futures options.
C) foreign currency warrants.
D) borrowing and lending in the domestic and foreign money markets.
2) A
Q3) If you have a long position in a foreign currency, you can hedge with
A) a short position in a currency forward contract.
B) borrowing in the domestic and foreign money markets.
C) a short position in an exchange-traded futures option.
D) a short position in foreign currency warrants.
3) A
Q4) If you owe a foreign currency denominated debt, you can hedge with
A) a long position in a currency forward contract, or buying the foreign currency today and investing it in the foreign country.
B) a long position in a currency forward contract.
C) buying the foreign currency today and investing it in the foreign country.
D) a long position in an exchange-traded futures option.
4) A
Q5) The extent to which the value of the firm would be affected by unexpected changes in the exchange rate is
A) transaction exposure.
B) economic exposure.
C) translation exposure.
D) none of the options
5) B
Q6) The choice between a forward market hedge and a money market hedge often comes down to
A) flexibility and availability.
B) interest rate parity.
C) option pricing.
D) none of the options
6) B
Q7) Exchange rate risk of a foreign currency payable is an example of
A) economic exposure.
B) translation exposure.
C) transaction exposure.
D) none of the options
7) C
Q14) Buying a currency option provides
A) a right, but not an obligation, to buy or sell a currency.
B) limits the downside risk while preserving the upside potential.
C) a flexible hedge against exchange exposure.
D) all of the options
14) D
Q15) XYZ Corporation, located in the United States, has an accounts payable obligation of ¥750 million payable in one year to a bank in Tokyo. Which of the following is not part of a money market hedge?
A) Buy yen at the spot exchange rate.
B) Invest in risk-free Japanese securities with the same maturity as the accounts payable obligation.
C) Buy the ¥750 million at the forward exchange rate.
D) Find the present value of ¥750 million at the Japanese interest rate.
15) C
Q17) A call option to buy £10,000 at a strike price of $1.80 = £1.00 is equivalent to
A) a put option on £10,000 at a strike price of $1.80 = £1.00.
B) a call option on $18,000 at a strike price of $1.80 = £1.00.
C) a put option to sell $18,000 at a strike price of $1 = £0.5556.
D) none of the options
17) C
Q18) Your U.S. firm has a £100,000 payable with a 3-month maturity. Which of the following will hedge your liability?
A) Buy the present value of £100,000 today at the spot exchange rate, invest in the U.K. at i£.
B) Take a long position in a forward contract on £100,000 with a 3-month maturity.
C) Buy a call option on £100,000 with a strike price in dollars.
D) all of the options
18) D
Q19) Contingent exposure can best be hedged with
A) money market hedging.
B) options.
C) futures.
D) all of the options
19) B
Q20) An exporter can shift exchange rate risk to their customers by
A) invoicing in their customer’s local currency.
B) splitting the difference, and invoicing half of sales in local currency and half of sales in home currency.
C) invoicing in their home currency.
D) invoicing sales in a currency basket such as the SDR as the invoice currency.
20) C
Q21) In evaluating the pros and cons of corporate risk management, “market imperfections” refer to
A) management costs, corporate costs, liquidity costs, and trading costs.
B) information asymmetry, differential transaction costs, default costs, and progressive corporate taxes.
C) economic costs, noneconomic costs, arbitrage costs, and hedging costs.
D) leading and lagging, receivables and payables, and diversification costs.
21) B
Q22) Suppose the U.S. dollar substantially depreciates against the Japanese yen. The change in exchange rate
A) will tend to strengthen the competitive position of Japanese car makers at the expense of U.S. makers.
B) will tend to strengthen the competitive position of import-competing U.S. car makers.
C) will tend to weaken the competitive position of import-competing U.S. car makers.
D) none of the options
22) B
Q23) When exchange rates change,
A) U.S. firms that produce domestically and sell only to domestic customers can be affected if they compete against imports.
B) 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.
C) U.S. firms that produce domestically and sell only to domestic customers will be unaffected.
D) U.S. firms that produce domestically and sell only to domestic customers will be unaffected, and U.S. firms that produce domestically and sell only to domestic customers can be affected if they compete against imports.
23) A
Q24) Two studies found a link between exchange rates and the stock prices of U.S. firms;
A) this suggests that exchange rate changes can systematically affect the value of the firm by influencing its operating cash flows, as well influencing the domestic currency values of its assets and liabilities.
B) this suggests that exchange rate changes can systematically affect the value of the firm by influencing its operating cash flows.
C) this suggests that exchange rate changes can systematically affect the value of the firm by influencing the domestic currency values of its assets and liabilities.
D) none of the options
24) A
Q25) Exposure to currency risk can be measured by the sensitivities of
A) the future home currency values of the firm’s assets and liabilities, as well as the firm’s operating cash flows to random changes in exchange rates.
B) the future home currency values of the firm’s assets and liabilities.
C) the firm’s operating cash flows to random changes in exchange rates.
D) none of the options
25) A
Q26) Economic exposure refers to
A) the sensitivity of realized domestic currency values of the firm’s contractual cash flows denominated in foreign currencies to unexpected exchange rate changes.
B) ex post and ex ante currency exposures.
C) the potential that the firm’s consolidated financial statement can be affected by changes in exchange rates.
D) the extent to which the value of the firm would be affected by unanticipated changes in exchange rate.
26) D
Q27) Before you can use the hedging strategies such as a forward market hedge, options market hedge, and so on, you should consider running a regression of the form P = a + b × S + e . When reviewing the output, you should initially focus on
A) the slope coefficient b.
B) the intercept a.
C) R2.
D) mean square error, MSE.
27) A
Q28) The link between the home currency value of a firm’s assets and liabilities and exchange rate fluctuations is
A) asset exposure.
B) asset exposure and operating exposure.
C) operating exposure.
D) none of the options
28) A
Q29) In recent years, the U.S. dollar has depreciated substantially against most major currencies of the world, especially against the euro.
A) The stronger euro has made many American products less expensive in euro terms, boosting sales of U.S. products in Europe.
B) The stronger euro has made many European products more expensive in dollar terms, hurting sales of these products in the United States. Additionally, the stronger euro has made many American products less expensive in euro terms, boosting sales of U.S. products in Europe.
C) The stronger euro has made many European products more expensive in dollar terms, hurting sales of these products in the United States.
D) none of the options
29) B
Q30) From the perspective of the U.S. firm that owns an asset in Britain, the exposure that can be measured by the coefficient b in regressing the dollar value P of the British asset on the dollar/pound exchange rate S using regression equation P = a + b × S + e is
A) asset exposure.
B) accounting exposure.
C) operating exposure.
D) none of the options
30) A
Q31) On the basis of regression equation P = a + b × S + e, we can decompose the variability of the dollar value of the asset, VAR(P), into two separate components: VAR(P) = b2 × VAR(S) + VAR(e). The first term in the right-hand side of the equation, b2 × VAR(S) represents
A) the part of the variability of the dollar value of the asset that is related to random changes in the exchange rate, as well as the residual part of the dollar value variability that is independent of exchange rate movements.
B) the part of the variability of the dollar value of the asset that is related to random changes in the exchange rate.
C) the residual part of the dollar value variability that is independent of exchange rate movements.
D) none of the options
31) B
