Exam 3 Flashcards Preview

FIN475 > Exam 3 > Flashcards

Flashcards in Exam 3 Deck (48):
1

How do you hedge an account receivable in a foreign currency?

Buy a put (right to sell) the foreign currency

2

How do you hedge an account payable in a foreign currency?

Buy a call (right to buy) the foreign currency

3

Pay or collect early.

Lead

4

Pay or collect late.

Lag

5

Expected to depreciate.

Soft

6

Expected to appreciate.

Hard

7

Firm would like to ____ hard currency payables and ____ soft currency payables

lead; lag

8

Firm would like to ____ hard currency receivables and ____ soft currency receivables.

lag; lead

9

Gains(losses) from currency+gains from option(if exercised) - option cost

Options hedge

10

(F-S)*amount.

Forwards hedge

11

Which of the following is not considered a transaction exposure for a US firm?
a. buying semiconductors from Japan for a yen price, payable in three months.
b. building a plant in Mexico, with expected profits denominated in pesos.
c. bidding a construction project in India, with the bid denominated in rupees.
d. entering a forward contract to sell British pounds.
e. all of the above are transaction exposures for the U.S. firm.

b. building a plant in Mexico, with expected profits denominated in pesos.

12

One reason why a publicly-held corporation may not want to hedge its transaction exposure is that:
a. hedging destroys value regardless of the outcome
b. diversified investors prefer to hedge on their own
c. hedging increases the likelihood of catastrophic loss
d. hedging costs are easier to hide
e. none of the above is correct

b. diversified investors prefer to hedge on their own

13

A company that wants to hedge an account payable in yen through a money market hedge will:
a. invest in yen
b. borrow in yen
c. invest in dollars
d. buy forward contracts
e. be looking for a new financial officer

a. invest in yen

14

Assume that a U.S. car manufacturer has manufacturing plants in Brazil. If management of the company expects Brazil to devalue the real, how could they take advantage of their prediction?
a. by increasing marketing in Brazil
b. by increasing production in Brazil
c. by decreasing production in Brazil
d. by increasing production in the U.S.
e. (c) and (d) above.

b. by increasing production in Brazil

15

What could a Japanese company with royalty income in euros do to reduce its operating exposure?
a. borrow in euros
b. invest in euros
c. increase euro-denominated sales.
d. all of the above

a. borrow in euros

16

What is the central problem in consolidating the financial statements of a foreign subsidiary?
a. establishing the historical rate
b. determining a translation hedge
c. hedging transaction exposure
d. determining the best exchange rate to use for translating different line items
e. none of the above

d. determining the best exchange rate to use for translating different line items

17

The current spot exchange rate is $1.25 = €1.00 and the three-month forward rate is $1.30 = €1.00. Consider a three-month American call option on €62,500 with a strike price of $1.28 = €1.00. If you pay an option premium of $5,000 (on the entire contract) to buy this call, at what exchange rate will you break-even?
a. $1.22 = €1.00
b. $1.30 = €1.00
c. $1.28 = €1.00
d. $1.26 = €1.00
e. none of the above.

e. none of the above
($1.36 would be correct)

18

Which of the following best describes operating exposure?
a. the extent to which the foreign currency value of the firm's assets is affected by unanticipated changes in exchange rates.
b. the extent to which the firm's operating cash flows will be affected by unexpected changes in exchange rates
c. the effect of changes in exchange rates will have on the consolidated financial reports of a MNC.
d. the effect of unanticipated changes in exchange rates on the dollar value of contractual obligations denominated in a foreign currency.
e. each of the above describes one of the different types of operating exposure.

b. the extent to which the firm's operating cash flows will be affected by unexpected changes in exchange rates

19

Yesterday, you entered into a futures contract to buy €62,500 at $1.29 per €. Suppose the futures price closes today at $1.31. How much have you made/lost?
a. Lost $0.02/€
b. Gained €0.02/$
c. Lost $1,250 total
d. Gained $1,250 Total
e. none of the above

d. Gained $1,250 Total

20

Which of the following options strategies would gain from depreciation of a currency?
a. Sell puts and buys calls on the currency expected to depreciate
b. Buy puts and sell calls on the currency expected to depreciate
c. Buy puts and buy calls on the currency expected to depreciate
d. Sell puts and sell calls on the currency expected to depreciate
e. None of the above

b. Buy puts and sell calls on the currency expected to depreciate

21

Translation exposure, also frequently called accounting exposure, refers to the effect that an unanticipated change in exchange rates will have on:
a. the choice of accounting methodology
b. consolidated financial reports of a multinational corporation
c. a firm’s competitive position
d. cash flows realized from foreign operations.
e. a firm’s competitive position.

b. consolidated financial reports of a multinational corporation

22

Comparing "forward" and "futures" exchange contracts, we can say that:
a. they are both “marked-to-market” daily.
b. a major difference is in the way the underlying asset is priced for future purchase or sale: futures settle daily and forwards settle at maturity.
c. a futures contract is traded on organized exchanges, while a forward contract is tailor-made by an international bank for its clients and is traded over the counter.
d. both (b) and (c)
e. all of the above

d. both (b) and (c)

23

The September Mexican peso (MXN) futures contract has a price of $0.7713 per MXN. You believe the spot price in September will be $0.7523 per MXN. What speculative position would you enter into to attempt to profit from your beliefs?
a. Write a put option on the MXN
b. Buy a call option on the MXN
c. Take a short position in the futures market on the MXN
d. Take a long position in the futures market on the MXN
e. None of the above.

c. Take a short position in the futures market on the MXN

24

The sensitivity of "realized" domestic currency values of the firm's contractual cash flows denominated in foreign currency to unexpected changes in the exchange rate is: a. Transaction exposure
b. Economic exposure
c. Translation exposure
d. Operating exposure
e. None of the above

a. Transaction exposure

25

A firm faced with exposure to a depreciating currency can reduce transaction exposure with a strategy of:
a. paying or collecting early.
b. paying or collecting late.
c. paying late, collecting early.
d. paying early, collecting late.
e. none of the above.

c. paying late, collecting early.

26

Suppose that Boeing Corporation exported a Boeing 737 to British Airways and billed £10 million payable in one year. If the U.K. interest rate is 9%, the spot exchange rate $1.50/£, and the one year forward exchange rate is $1.46/£, which of the following describes a step taken in the money market hedge by Boeing?
a.Borrow £9,174,312
b.Convert pounds received today to $13,761,468 at the spot exchange rate
c.Collect £10 million from British Airways and use it to repay the pound loan.
d. All of the above
e.None of the above—Boeing will receive $15,000,000 in one year with this hedge.

d. All of the above

27

When considering the pros and cons of corporate risk management, one argument in favor of hedging is:
a. exchange exposure management at the corporate level is redundant when stockholders can hedge on their own.
b. corporate risk management can effectively reduce systematic risk.
c. the firm is in a position to acquire lower cost hedges than individual stockholders are.
d. all of the above
e. none of the above.

c. the firm is in a position to acquire lower cost hedges than individual stockholders are.

28

If a U.S. importer has large Swiss franc payment due in 6 months, how would the importer hedge against exchange rate exposure in the options market?
a. borrow in Swiss francs
b. buy a put on the Swiss franc.
c. buy a call on the Swiss franc.
d. buy a call on the U.S. dollar.
e. none of the above.

c. buy a call on the Swiss franc.

29

When the Mexican peso collapsed at the end of 1994:
a. U.S. firms that exported to Mexico and priced in pesos were adversely affected.
b. U.S. firms that exported to Mexico and priced in dollars were adversely affected.
c. U.S. firms that imported goods priced in pesos from Mexico were adversely affected.
d. (a) and (b) above are correct.
e. all of the above are correct.

d. (a) and (b) above are correct.

30

A purely domestic firm that sources and sells only domestically:
a. faces exchange rate risk to the extent that it has international competitors in the domestic market.
b. faces no exchange rate risk should never hedge since this could actually increase its currency exposure.
c. faces exchange rate risk when foreign investors translate its financial statements.
d. (a) and (c)
e. none of the above.

a. faces exchange rate risk to the extent that it has international competitors in the domestic market.

31

What could a Japanese company with a large sales market in Europe do to reduce its operating exposure?
a. invest in euros
b. borrow in euros
c. increase euro-denominated sales.
d. increase yen-denominated sources of production
e. all of the above

b. borrow in euros

32

When exchange rates change:
a. the value of a foreign subsidiary's foreign currency denominated assets and liabilities change to new numbers still denominated in the foreign currency
b. value of a foreign subsidiary's foreign currency denominated assets and liabilities change when redenominated into the home currency
c. hedging should be done after the change.
d. all of the above
e. none of the above

b. value of a foreign subsidiary's foreign currency denominated assets and liabilities change when redenominated into the home currency

33

The currency of the primary economic environment in which the entity operates is defined in FASB 52 as:
a. the ‘”recording currency”
b. the “reporting currency”
c. the “functional currency”
d. the “current currency”
e. none of the above.

c. the “functional currency”

34

Suppose a U.S. firm has a Swiss subsidiary. Which of the following is a possible functional currency of the Swiss subsidiary?
a. the Swiss franc
b. the U.S. dollar
c. the euro
d. all of the above
e. (a) and (b) above

d. all of the above

35

The article “Foreign Firms Flood into the U.S. Debt Markets” is an example of
a. operating exposure created for U.S. firms when they issue debt denominated in a foreign currency.
b. foreign exchange exposure created (or hedged) for foreign firms when they issue debt denominated in the U.S. dollar.
c. the competitive effects of a stronger dollar on US exporting firms.
d. all of the above
e. none of the above

b. foreign exchange exposure created (or hedged) for foreign firms when they issue debt denominated in the U.S. dollar.

36

Can actively manage its operating exposure by shifting production in its locations.

Multinational Enterprise

37

If a foreign currency to the US unexpectedly appreciates, a US exporter can expect a(n) _____ in its foreign currency sales volume.

increase

38

(Future or Forward) Contract written for a pre-specified amount of time.

Future

39

(Future or Forward) Contract that can be written for any amount any time.

Forward

40

(Future or Forward) Contract where trading is written for smaller amounts of currency.

Future

41

(Future or Forward) Contract where trading occurs on an organized exchange.

Future

42

(Future or Forward) Contract that can be written for any amount of money.

Forward

43

(Future or Forward) Contract where trading is decentralized between banks and individuals.

Forward

44

(Future or Forward) Contract that is considered wholesale banking activity.

Forward

45

(Future or Forward) Contract that is sold in fixed amounts only.

Future

46

(Future or Forward) Contract that is typically used by large business firms that deal in very large amounts of foreign exchange.

Forward

47

Operates as an extension of the parent company, with cash flows and general business lines that are highly interrelated with those of the parent.

Integrated foreign entity

48

Operates in the local economic environment independent of the parent company

Self-sustaining foreign entity