general business data bank

Question # 00003663 Posted By: spqr Updated on: 11/18/2013 12:28 AM Due on: 11/29/2013
Subject Finance Topic Finance Tutorials:
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1Fundamentals of Multinational Finance, 4e(Moffett)

Chapter 10 Transaction and Translation Exposure

Multiple Choice and True/False Questions

The stages in the life of a transaction exposure can be broken into three distinct time periods. The first time period is the time between quoting a price and reaching an actual sale agreement or contract. The next time period is the time lag between taking an order and actually filling or delivering it. Finally, the time it takes to get paid after delivering the product. In order, these stages of transaction exposure may be identified as,

Answer

backlog, quotation, and billing exposure.

billing, backlog, and quotation exposure.

quotation, backlog, and billing exposure.

quotation, billing, and backlog exposure.

)1 ________ exposure deals with cash flows that result from existing contractual obligations.

A) Operating

B) Transaction

C) Translation

D) Economic

2) ________ exposure measures the change in the present value of the firm resulting from unexpected changes in exchange rates.

A) Operating

B) Transaction

C) Translation

D) Accounting

3) Each of the following is another name for operating exposure EXCEPT ________.

A) economic exposure

B) strategic exposure

C) accounting exposure

D) competitive exposure


4) Transaction exposure and operating exposure exist because of unexpected changes in future cash flows. The difference between the two is that ________ exposure deals with cash flows already contracted for, while ________ exposure deals with future cash flows that might change because of changes in exchange rates.

A) transaction; operating

B) operating; transaction

C) operating; accounting

D) none of the above

5) ________ exposure is the potential for accounting-derived changes in owner's equity to occur because of the need to translate foreign currency financial statements into a single reporting currency.

A) Transaction

B) Operating

C) Economic

D) Accounting

6) Losses from ________ exposure generally reduce taxable income in the year they are realized. ________ exposure losses may reduce taxes over a series of years.

A) accounting; Operating

B) operating; Transaction

C) transaction; Operating

D) transaction; Accounting

7) Losses from ________ exposure generally reduce taxable income in the year they are realized. ________ exposure losses are not cash losses and therefore, are not tax deductible.

A) transaction; Operating

B) accounting; Operating

C) accounting; Transaction

D) transaction; Translation

8) MNE cash flows may be sensitive to changes in which of the following?

A) exchange rates

B) interest rates

C) commodity prices

D) all of the above

10.2 Why Hedge?

1) ________ is a technique used by MNEs to deal with currency exposure.

A) No counter-measure

B) Speculation

C) Hedging

D) All are techniques MNEs could use.

2) Hedging, or reducing risk, is the same as adding value or return to the firm.

3) Assuming no transaction costs (i.e., hedging is "free"), hedging currency exposures should ________ the variability of expected cash flows to a firm and at the same time, the expected value of the cash flows should ________.

A) increase; not change

B) decrease; not change

C) not change; increase

D) not change; not change


4) Which of the following is NOT cited as a good reason for hedging currency exposures?

A) Reduced risk of future cash flows is a good planning tool.

B) Reduced risk of future cash flows reduces the probability that the firm may not meet required cash flows.

C) Currency risk management increases the expected cash flows to the firm.

D) Management is in a better position to assess firm currency risk than individual investors.

5) There is considerable question among investors and managers about whether hedging is a good and necessary tool.

6) Which of the following is cited as a good reason for NOT hedging currency exposures?

A) Shareholders are more capable of diversifying risk than management.

B) Currency risk management through hedging does not increase expected cash flows.

C) Hedging activities are often of greater benefit to management than to shareholders.

D) All of the above are cited as reasons NOT to hedge.

7) The key arguments in opposition to currency hedging such as market efficiency, agency theory, and diversification do not have financial theory at their core.

8) ________ exposure may result from a firm having a payable in a foreign currency.

A) Transaction

B) Accounting

C) Operating

D) None of the above


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