Multiple Choice
Identify the
choice that best completes the statement or answers the question.
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1.
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Translation exposure reflects:
a. | the exposure of a firm's ongoing international 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. |
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2.
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Diz ltd. is a UK-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 ltd is a UK-based MNC that has the same level of net cash flows in these currencies as Diz ltd
except that its euros represent net cash outflows. Which firm has a higher exposure to exchange rate
risk?
a. | Diz ltd | b. | Yanta ltd | c. | the firms have about
the same level of exposure. | d. | neither firm has any
exposure. |
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3.
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Which of the following operations benefits 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 |
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4.
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Magent ltd. is a UK company that has exposure to the Swiss franc (SF) and Danish
kroner (DK). It has net inflows of SF 200 million and net outflows of DK 500 million. The present
exchange rate of the SF is about £0.22 while the present exchange rate of the DK is £0.05.
Magent ltd. has not hedged these positions. The SF and DK are highly correlated in their movements
against the pound. If the pound weakens, then Magent ltd. will:
a. | benefit, because the pound value of its SF position exceeds the pound value of its DK
position. | b. | benefit, because the pound value of its DK position exceeds the pound value of its SF
position. | c. | be adversely affected, because the pound value of its SF position exceeds the pound
value of its DK position. | d. | be adversely affected, because the pound value
of its DK position exceeds the pound value of its SF position. |
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5.
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A firm produces goods for which substitute goods are produced in all countries.
Appreciation of the firm's local currency should:
a. | increase local sales as it reduces foreign competition in local
markets. | b. | increase the firm's exports denominated in the local
currency. | c. | increase the returns earned on the firm's foreign bank
deposits. | d. | increase the firm's cash outflow required to pay for imported supplies
denominated in a foreign currency. | e. | none of the
above |
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6.
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Subsidiary A of Mega plc has net inflows in Australian dollars of A$1,000,000,
while Subsidiary B has net outflows in Australian dollars of A$1,500,000. The expected exchange rate
of the Australian dollar is £0.30. What is the net inflow or outflow as measured in
pounds?
a. | £150,000 outflow. | c. | £1,666,000 inflow. | b. | £150,000
inflow. | d. | £1,666,000
outflow. |
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7.
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If an MNC expects cash inflows of equal amounts in two currencies, and the two
currencies are ___________ correlated, the MNC's transaction exposure is relatively
___________.
a. | negatively; high | c. | positively; low | b. | negatively; low | d. | none of the
above |
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8.
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The maximum one-day loss computed for the value-at-risk (VAR) method, does not
depend on:
a. | the expected percentage change in the currency for the next day. | b. | the standard
deviation of the daily percentage changes in the currency over a previous period. | c. | the current level of
interest rates. | d. | the confidence level used. |
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9.
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Volusia, plc is a UK-based exporting firm that expects to receive payments
denominated in both euros and Canadian dollars in one month. Based on today's spot rates, the
pound value of the funds to be received is estimated at £500,000 for the euros and £300,000
for the Canadian dollars. Based on data for the last fifty months, Volusia estimates the standard
deviation of monthly percentage changes to be 8 percent for the euro and 3 percent for the Canadian
dollar. The correlation coefficient between the euro and the Canadian dollar is 0.30. What is the
portfolio standard deviation?
a. | 3.00%. | c. | 17.98%. | b. | 5.44%. | d. | none of the
above |
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10.
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The __________ the percentage of an MNC's business conducted by its foreign
subsidiaries, the _________ the percentage of a given financial statement item that is susceptible to
translation exposure.
a. | greater; smaller | c. | greater; greater | b. | smaller; greater | d. | none of the
above |
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11.
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Consider an MNC that is exposed to the Taiwan dollar (TWD) and the Egyptian
pound (EGP). 25% of the MNC's funds are Taiwan dollars and 75% are pounds. The standard
deviation of exchange movements is 7% for Taiwan dollars and 5% for pounds. The correlation
coefficient between movements in the value of the Taiwan dollar and the pound is .7. Based on this
information, the standard deviation of this two-currency portfolio is approximately:
a. | 5.13%. | c. | 4.33%. | b. | 2.63%. | d. | 5.55%. |
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True/False
Indicate whether the
statement is true or false.
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12.
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Two highly negatively correlated currencies act almost as if they are the same
currency.
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