International Financial Management, Abridged 12th Edition by Madura – Test Bank

International Financial Management, Abridged 12th Edition by Madura – Test Bank

Chapter 10—Measuring Exposure to Exchange Rate Fluctuations

1. Translation exposure reflects:
a. the exposure of a firm’s international contractual transactions to exchange rate fluctuations.
b. the exposure of a firm’s local currency value to transactions between foreign exchange traders.
c. the exposure of a firm’s financial statements to exchange rate fluctuations.
d. the exposure of a firm’s cash flows to exchange rate fluctuations.

ANS: C PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.04
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

2. Transaction exposure reflects:
a. the exposure of a firm’s international contractual transactions to exchange rate fluctuations.
b. the exposure of a firm’s local currency value to transactions between foreign exchange traders.
c. the exposure of a firm’s financial statements to exchange rate fluctuations.
d. the exposure of a firm’s cash flows to exchange rate fluctuations.

ANS: A PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

3. Economic exposure refers to:
a. the exposure of a firm’s international contractual transactions to exchange rate fluctuations.
b. the exposure of a firm’s local currency value to transactions between foreign exchange traders.
c. the exposure of a firm’s financial statements to exchange rate fluctuations.
d. the exposure of a firm’s cash flows to exchange rate fluctuations.
e. the exposure of a country’s economy (specifically GNP) to exchange rate fluctuations.

ANS: D PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.03
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

4. Diz Co. is a U.S.-based MNC with net cash inflows of euros and net cash inflows of Swiss francs. These two currencies are highly correlated in their movements against the dollar. Yanta Co. is a U.S.-based MNC that has the same level of net cash flows in these currencies as Diz Co. except that its euros represent net cash outflows. Which firm has a higher exposure to exchange rate risk?
a. Diz Co.
b. Yanta Co.
c. the firms have about the same level of exposure.
d. neither firm has any exposure.

ANS: A PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.10.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Analysis

5. Jacko Co. is a U.S.-based MNC with net cash inflows of euros and net cash inflows of Sunland francs. These two currencies are highly negatively correlated in their movements against the dollar. Kriner Co. is a U.S.-based MNC that has the same exposure as Jacko Co. in these currencies, except that its Sunland francs represent cash outflows. Which firm has a high exposure to exchange rate risk?
a. Jacko Co.
b. Kriner Co.
c. the firms have about the same level of exposure.
d. neither firm has any exposure.

ANS: B PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.10.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Analysis

6. According to the text, currency variability levels ____ perfectly stable over time, and currency correlations ____ perfectly stable over time.
a. are; are not
b. are; are
c. are not; are not
d. are not; are

ANS: C PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

7. Which of the following operations benefits from appreciation of the firm’s local currency?
a. borrowing in a foreign currency and converting the funds to the local currency prior to the appreciation.
b. receiving earnings dividends from foreign subsidiaries.
c. purchasing supplies locally rather than overseas.
d. exporting to foreign countries.

ANS: A PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.03
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

8. Which of the following operations benefit(s) from depreciation of the firm’s local currency?
a. borrowing in a foreign country and converting the funds to the local currency prior to the depreciation.
b. purchasing foreign supplies.
c. investing in foreign bank accounts denominated in foreign currencies prior to depreciation of the local currency.
d. A and B

ANS: C PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.03
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

9. Economic exposure can affect:
a. MNCs only.
b. purely domestic firms only.
c. A and B
d. none of the above

ANS: C PTS: 1 DIF: Easy OBJ: INFM.MADU.15.10.03
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02