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11.2 Measuring Operating Exposure

1) Operating exposure

A) creates foreign exchange accounting gains and losses.

B) causes exchange rates to fluctuate.

C) is the possibility that future cash flows will change due to an unexpected change in foreign exchange rates.

D) measures a country's propensity to import and export.

Answer: C

2) An unexpected change in exchange rates impacts a firm's cash flows at what level(s)?

A) short run

B) medium run (equilibrium case)

C) long run

D) all of the above

3) Which of the following is NOT an operating cash flow?

A) intra-firm payable

B) account receivable from an unrelated party

C) interest payment by a subsidiary to a parent company

D) account payable to a foreign subsidiary

4) ________ risk measures the change in value of the firm that results from changes in future operating cash flows caused by unexpected changes in exchange rates.

A) Transaction

B) Accounting

C) Operating

D) Translation

11.3 Strategic Management of Operating Exposure

1) Which of the following is NOT an example of diversifying operations?

A) diversifying sales

B) diversifying location of operations

C) raising funds in more than one country

D) sourcing raw materials in more than one country

2) Which of the following is NOT an example of diversification in financing?

A) raising funds in more than one market

B) raising funds in more than one country

C) diversifying sales

D) All of the above qualify.

3) Management must be able to predict disequilibria in international markets to take advantage of diversification strategies.

4) When disequilibria in international markets occur, management can take advantage by

A) doing nothing if they are already diversified and able to realize beneficial portfolio effects.

B) recognizing disequilibria faster than purely domestic competitors.

C) shifting operational of financing activities to take advantage of the disequilibria.

D) all of the above.

) Purely domestic firms will be at a disadvantage to MNEs in the event of market disequilibria because

A) domestic firms lack comparative data from its own sources.

B) international firms are already so large.

C) all of the domestic firm's raw materials are imported.

D) None of the above. Domestic firms are not at a disadvantage.

6) Which of the following is NOT an advantage of foreign exchange risk management?

A) the reduction of the variability of cash flows due to domestic business cycles

B) increased availability of capital

C) reduced cost of capital

D) All of the above are potential advantages of foreign exchange risk management.

7) The primary method by which a firm may protect itself against operating exposure impacts is

A) money market hedges.

B) diversification.

C) forward contract hedges.

D) balance sheet hedging.

8) An advantage of international diversification is the

A) reduction in the variability of future cash flows due to domestic business cycles.

B) increase in the availability of capital.

C) diversification of political risk.

D) all of the above.

9) Diversifying sources of financing, regardless of the currency of denomination, can lower a firm's cost of capital and increase its availability of capital