International Corporate Finance 1st Edition By Ashok Robin – Test Bank

 

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Chapter 04

Currency Systems and Valuation

 

Multiple Choice Questions

1.   The values of currencies that freely floating are determined by:
A. central banks.
B. currency boards.
C. market forces.
D. the gold standard.

 

2.   The mint parity rate is determined by:
A. comparing the amount of gold necessary to buy the same number of units of two different currencies.
B. determining the cost of minting a certain number of coins representing a certain currency.
C. comparing the gold standard rate of a currency with its exchange rate.
D. comparing the exchange rate changes of a currency over a period of time.

 

3.   When a currency strengthens against other currencies, a central bank:
A. may sell gold to counter that appreciation in the currency’s value.
B. will buy its currency in hopes of avoiding losses.
C. will sell its currency in hopes of making a profit.
D. may buy gold to counter that appreciation in the currency’s value.

 

4.   The event that revived the gold standard as the basis for currency valuations in many parts of the world was:
A. Bretton Woods Agreement.
B. World War II.
C. the creation of the International Monetary Fund.
D. the creation of the United Nations.

 

 

5.   The reintroduction of the gold standard was intended to accomplish two objectives:
A. make the work of the IMF possible and stabilize currency values.
B. make currencies freely convertible into other currencies and stabilize currency values.
C. create the IMF and make it possible for Germany to pay war reparations.
D. allow European countries to finance rebuilding after World War II and stabilize currency values.

 

6.   As a result of the Bretton Woods Agreement, the USD:
A. was devalued and the value of the USD was set at 35 per ounce of gold.
B. was adopted as the currency of exchange for the IMF.
C. became the key international currency and the value of the USD was established at 35 per ounce of gold.
D. was established as the currency to which the value of all other currencies would be linked.

 

7.   Taxes and other restrictions on the movement of capital between nations are:
A. capital controls and have a negative effect on the stabilization of currency values.
B. capital controls and were encouraged by the Bretton Woods Agreement.
C. the creation of the IMF and are intended to stabilize currency values.
D. trade restrictions that are controlled by the IMF.

 

8.   We now understand that _____________________ is (are) the most important factor in global economic growth.
A. free trade agreements
B. the work of the IMF
C. free movement of capital
D. minimal restrictions on immigration

 

 

9.   One of the major provisions of the Bretton Woods Agreement, which eventually contributed to the end of the gold standard was:
A. the provision that allowed the United States to unilaterally change the value of the USD in terms of gold.
B. that silver could be substituted for gold as the reference for the value of currencies.
C. that the IMF could adjust the conversion rate of USD into gold periodically.
D. that USD would be converted into the equivalent amount of gold for an entity that requested it.

 

10.                In the 1960’s the United States had a large balance of payments deficit due in large part to:
A. the fact that the USD fixed at 35 per ounce of gold was undervalued.
B. the fact that the USD fixed at 35 per ounce was overvalued.
C. the value of the USD relative to gold was fluctuating.
D. speculators buying and selling USD at rates other than the established rate of USD 35 per ounce of gold.

 

11.                As a result of its balance of payments deficit in the 1960’s and the effect on its currency:
A. the United States was able to sell all of its gold holdings at the established price of USD 35 per ounce.
B. the United States was no longer able to sell its gold holdings at the established price of USD 35 per ounce.
C. the USD ceased to be the key international currency that it was under the Bretton Woods Agreement.
D. the IMF had to make temporary loans to the United States.

 

12.                As the Bretton Woods Agreement was being abandoned and new approaches to dealing with currency valuations were being sought, the economies of the United States and other major countries were weakening. This weakening was evidenced by:
A. higher exports, higher inflation and rising currency values.
B. declining currency values, an outflow of gold and higher interest rates.
C. lower imports, higher exports and stable currency values.
D. higher imports, higher inflation and outflow of a nation’s currency.

 

 

13.                In response to the weakening of its economy as the Bretton Woods Agreement was breaking down and new approaches to stabilization of currency values was taking place, the United States:
A. announced that it would no longer convert the USD to gold and it imposed a tax on imports.
B. experimented with trying to have its currency float so that the currency markets would determine its value.
C. sought to acquire more gold to reinforce the stability of its economy.
D. sought to sell its gold reserves since gold was selling on the international markets at more than USD 35 per ounce.

 

14.                Whether the Smithsonian Agreement was a reason for subsequent developments or not, the Smithsonian Agreement was followed by:
A. significant growth in international trade and the signing of several important international trading agreements.
B. destructive trade wars that threatened the stability of most of the world’s strongest currencies.
C. the reorganization of the IMF.
D. new capital controls that were intended to moderate large swings in currency values.

 

15.                The European Monetary Union was intended to:
A. increase the strength of European currencies and prepare for the adoption of the euro as the European currency.
B. establish the gold standard in Europe and make the euro the international currency of choice.
C. make exchange rates uniform and reduce inflation.
D. stabilize exchange rates, control inflation, and integrate economic performance among member nations.

 

16.                The first step in making the euro the single currency of Europe was:
A. taking steps to make all of the currencies in use in Europe have equal value.
B. linking the value of all currencies in Europe to the USD.
C. the institution of several policies including the freeing of capital flow among member states.
D. obtaining the approval of the International Monetary Fund.

 

 

17.                In a fixed currency system:
A. the value of the currency is “fixed” in that its value is determined by some anchor, usually another currency.
B. a definite value of the currency is established.
C. the total amount of a currency that can be issued is established and cannot be changed without action by the central bank.
D. the value of the currency is directly linked to the price of gold.

 

18.                In a currency system where one country can issue its currency only against reserves of a specified foreign currency, the system is a:
A. pegged system.
B. floating system.
C. currency board arrangement.
D. fixed peg arrangement.

 

19.                In a currency board arrangement:
A. the currency board can adjust either of the two currencies involved.
B. the currency board determines the exchange rate.
C. the two currencies involved float independently of each other.
D. the two currencies involved maintain a fixed exchange rate.

 

20.                A currency system where small adjustments to value of the currency are made at preset points or in response to specific macroeconomic indicators is a:
A. currency board system.
B. crawling peg system.
C. managed float system.
D. independent float system.

 

21.                In an independent floating currency system, official intervention is:
A. intended to moderate changes in the exchange rate rather than to set the exchange rate.
B. not allowed because the value of the currency is to be set by market forces.
C. taken only to maintain the predetermined exchange rate.
D. allowed only indirectly as through changing official interest rates.

 

 

22.                For a floating currency system to be effective:
A. the currency markets must be subject to significant regulation and the central bank must be willing to take action when predetermined indicators suggest action is necessary.
B. the currency market must be diversified and must not be dominated by any specific currency.
C. there must be effective market and monetary infrastructures and the currency market must be large and liquid.
D. the central bank of the nation must have cooperative agreements with the central banks of other nations that allow those other central banks to take actions to stabilize the subject currency.

 

23.                The currency system of the euro-area nations should be considered:
A. a floating currency system.
B. a crawling per system.
C. a managed float system.
D. a currency board arrangements.

 

24.                Widespread speculation that a currency’s value will change significantly in the near future can cause:
A. the currency value to decrease precipitously.
B. short-term investors to lose confidence in the currency.
C. long-term investors to lose confidence in the currency.
D. the currency value to increase precipitously.

 

25.                In pegged currency systems, the country fixes its currency value to the value of some other stable currency and:
A. does not interfere with the value of its currency unless it determines that the currency to which its currency is pegged is not performing as expected.
B. only acts to affect the value of its currency if the value of its currency decreases significantly.
C. allows its currency value to fluctuate in a narrow band around the fixed value and then takes steps to maintain its currency’s value within that band.
D. only acts to affect the value of its currency if the value of its currency increases significantly.

 

 

26.                When a country pegs the value of its currency to the value of some other currency, that country:
A. formally agrees not to adopt economic policies that are inconsistent with those of the country to which the currency is pegged.
B. by necessity has to follow the macroeconomic policies of the country to which the currency is pegged.
C. is free to adopt its own economic policy without regard to the economic policies of the country to which the currency is pegged.
D. is free to adopt its own economic policies but is required to consult with the country to which the currency is pegged.

 

27.                For the country using another country’s currency for domestic transactions, the result is usually:
A. that the country whose currency is being used formally requests that it’s currency not be used.
B. the country whose currency is being used encourages the use of its currency because it increases demand for and the value of the currency.
C. the currency markets stop making the currency of the country that is being used available to the country that is using that currency.
D. that the country’s citizen end up holding substantial assets denominated in the currency of the other country that is being used.

 

28.                A disadvantage of using a pegged currency system is that:
A. the country whose currency is pegged must decide on its own economic policies.
B. the country whose currency is pegged does not have the option of adopting economic policies different from those of the country to which the currency is pegged.
C. the cost of maintaining the peg is substantial and must be paid by those transacting business in the country whose currency is pegged.
D. international currency markets shun currency whose value is pegged to another currency.

 

29.                Countries most likely to use a pegged currency system are those that:
A. have a small economy with a dominant trading partner with a stable currency.
B. have highly structured labor markets and monetary policies.
C. offer attractive investment opportunities for foreign entities.
D. seek as little outside interference from the rest of the world as possible.

 

 

30.                The value of a foreign currency is:
A. stable, since values are determined by the marketplace.
B. not subject to determination except at the specific time at which a transaction in the currency occurs.
C. subject to change depending on whether it is a pegged or floating currency.
D. subject to change and determined by forces of supply and demand.

 

31.                Demand for a foreign currency is generated by:
A. government policies.
B. the sources from which the currency can be obtained.
C. requirements of MNCs and foreign travel.
D. events within the country whose currency is being considered.

 

32.                Demand for a currency is ______________ related to the value of that currency.
A. inversely
B. directly
C. not
D. only slightly

 

33.                The graph of demand for a currency is a line that slopes down to the right, which indicates that demand:
A. increases as the value of the currency increases.
B. increases as the units of currency bought increases.
C. decreases as the value of the currency increases.
D. decreases as the units of the currency bought decreases.

 

34.                If potential purchasers of a currency are very sensitive to changes in the value of that currency, that currency is said to have:
A. low demand elasticity.
B. high demand elasticity.
C. low demand.
D. high demand.

 

 

35.                When entities purchase assets denominated in foreign currencies, those entities are:
A. decreasing the supply of the foreign currency because they are using the foreign currency to purchase the assets.
B. not affecting the supply of the foreign currency involved because there is a finite supply of any currency.
C. creating a supply of the foreign currency because they are paying for those purchases in the foreign currency.
D. not affecting the supply of foreign currency because the supply of a currency can only be changed by the central bank that controls the currency.

 

36.                Generally, supply of a currency is:
A. directly related to the value of the currency.
B. indirectly related to the value of the currency.
C. inversely related to the value of the currency.
D. not related to the value of the currency.

 

37.                The graph of supply of a currency shows:
A. a line that is essentially horizontal indicating that supply of a currency is not closely related to value of the currency.
B. a line that is essentially vertical indicating that the supply of a currency is controlled by the government issuing the currency.
C. a line that slopes downward from left to right indicating that the supply of a currency decreases as the value of the currency increases.
D. a line that slopes upward from left to right indicating that the higher the value of the currency, the greater the supply of that currency.

 

38.                The equilibrium value of a currency is the value:
A. at which the amount of the currency that is demanded will equal the amount of the currency that is supplied.
B. at which the currency is most often found.
C. of the currency that has been maintained for at least 30 days.
D. at which the country issuing the currency will issue additional currency.

 

 

39.                Currency equilibrium is more academic than real because:
A. the concept of currency equilibrium was developed by an theoretical economist and has never been observed in practice.
B. when a currency approaches equilibrium, governments act to avoid currency equilibrium.
C. supply and demand constantly react to market forces so that the amount demanded and the amount supplied of a currency are almost never the same.
D. some currencies are pegged and some currencies are free floating so that react to market forces differently.

 

40.                The traditional view of currency values focuses on:
A. aggregate supply and demand in all transactions in which the currency is used.
B. the current account in a country’s balance of payments.
C. how long the currency has been in existence and the long term trends in the value of the currency.
D. volatility of the currency on international currency markets.

 

41.                A change in prices not the result of product improvement is called inflation and is generally considered to be a negative economic development, but:
A. downward changes in prices, or deflation, is a positive economic development and can offset inflation.
B. inflation is not uniform across all product categories, so inflation may negatively affect only certain product categories.
C. inflation generally does not last long and is self-correcting, so monetary authorities do not consider inflation to be a concern for currency values.
D. but inflation affects all product categories, so prices of products relative to each other do not change.

 

42.                Gross Domestic Product measures:
A. economic activity in a country in terms of goods and services produced within that country in a specific period of time.
B. inflation and currency value.
C. the percentage change in currency value over a stated period of time.
D. productivity of a country over a stated period of time.

 

 

43.                If a country has high productivity, it can expect:
A. high demand for its goods and high demand for the foreign currency most often used to purchase its goods.
B. level demand for its goods, but high demand for its currency.
C. level demand for its goods, and high demand for the foreign currency most often used to purchase its goods.
D. high demand for the goods it produces and high demand for its currency.

 

44.                Preference for foreign goods rather than domestic goods:
A. increases demand for both foreign currency and domestic currency.
B. increases demand for foreign currencies and decreases demand for the domestic currency.
C. decreases demand for both foreign currency and domestic currency.
D. increases demand for domestic currency and decreases demand for foreign currency.

 

45.                A country with relatively high interest rates will attract foreign investment which will:
A. increase the value of the currency in that country.
B. decrease the value of the currency in that country.
C. not affect the value of the currency in that country.
D. increase the value of all foreign currencies.

 

 

Essay Questions

46.                What was the classical gold standard and why is it not observed today?

 

 

 

 

 

47.                What economic justification is there for regional currencies such as the euro?

 

 

 

 

48.                How does a floating currency system allow a country more flexibility in dealing with its economic system?

 

 

 

 

49.                How do price levels in a country affect the value of that country’s currency?

 

 

 

 

50.                What is the difference between nominal and real rates of interest?

 

Chapter 07

Currency Exposure Management

 

Multiple Choice Questions

1.   The first step for a manager in dealing with the currency exposure of an MNC is to:
A. determine whether the estimated level of currency risk warrants mitigations efforts.
B. determine what strategies to use to reduce or eliminate currency risks.
C. decide whether currency risks arise from transaction or operating exposures.
D. analyze the options that are available to the firm and estimate the cost of pursuing each option.

 

2.   Using derivatives such as forwards, options and money markets to control currency exposure is called:
A. swapping.
B. gambling.
C. debt contracting.
D. hedging.

 

3.   In the context of corporate finance, activities undertaken to reduce the variance of cash flow is called:
A. MNC management.
B. risk management.
C. hedging.
D. netting.

 

4.   When a firm reduces its currency risk, it can better concentrate on its strategic plan and:
A. minimize its interest costs.
B. improve efficiency in operations.
C. maximize the use of tax shelters.
D. capture a larger share of its markets.

 

 

5.   MNC’s often use derivatives to control:
A. currency exposure.
B. management compensation.
C. operating exposure.
D. hedging.

 

6.   Hedging to address mitigation of transaction exposure primarily focuses on:
A. risk management.
B. payables and receivables.
C. research and development costs.
D. taxable income.

 

7.   In mitigating operating exposure, ____________ are more relevant than ______________.
A. standard deviation; market inefficiencies
B. debt contracting; customer and supplier concerns
C. hedging; operating strategies
D. operating strategies; hedging

 

8.   Studies have shown that investment opportunities in many industries are negatively correlated with industry cash flow. This means that:
A. firms that can maintain their cash flow when other firms in the industry are experiencing declining cash flow can take advantage of opportunities that other firms cannot pursue.
B. firms within a particular industry are destined to experience the same cash flow declines and increases as other firms in their industry experience.
C. investment opportunities within an industry increase when cash flow within the industry increases.
D. hedging is not a benefit to a firm if the general trend of cash flow within that industry is declining.

 

 

9.   Firms can minimize income taxes by generating level taxable income from year to year because:
A. large swings in taxable income attract the attention of taxing officials and can trigger tax audits.
B. level taxable income from year to year makes computing income tax liability easier each year.
C. tax rates and tax laws change often and consistent levels taxable income usually mean that the effect of those changes on tax liability will be minimized.
D. income tax schemes are usually progressive and tax shields are only useful when a firm has taxable income.

 

10.                A progressive income tax scheme means:
A. marginal income tax rates increase as taxable income increases.
B. marginal income tax rates decrease as taxable income increases.
C. income tax revenues are used for more productive purposes as tax revenues increase.
D. firms can receive rebates of taxes paid after tax revenues reach prescribed levels.

 

11.                If a firm cannot use available tax shields in the year those tax shields are available, what happens to the benefits of those tax shields?
A. The benefits are not lost or reduced because they can be used to offset or reduce future taxable income.
B. The benefits of the tax shields are always lost and cannot be taken advantage of in future years.
C. The benefits are allocated to other firms in the industry.
D. The benefits provided by the tax shields are either lost because the tax shield benefits expire or are reduced because the benefits are taken in later years.

 

12.                Examples of tax shields available to firms include:
A. interest income and investment income.
B. hedging expenses and tax-free income.
C. depreciation and interest paid.
D. bond issuance expenses and dividends paid.

 

 

13.                Managers who receive stock options in their firms as part of their compensation may be most interested in:
A. level income in their firms because level income is an indication of stability and stability leads to higher stock prices.
B. income volatility in their firms because income volatility can lead to stock price volatility which can allow the exercise of stock options at times advantageous to the managers.
C. increasing income in their firms because increasing income leads to higher stock prices and an increasing value of their investment in the firm.
D. decreasing income in their firms because decreasing income leads to lower stock prices which gives the holders of stock options an opportunity to exercise those options at advantageous stock price levels.

 

14.                Agency theory in firms suggests that:
A. owners of firms want to pursue risk-adverse policies to stabilize the firm’s cash flow and increase the value of their ownership interests.
B. managers who hold stock in their firms will not pursue hedging opportunities because hedging minimizes risk and managers want higher earnings so that their compensation will increase.
C. managers who hold stock in their firms will pursue risk-adverse policies to reduce volatility of the firm’s cash flow.
D. owners will want to pursue hedging strategies to safeguard the values of their investments in the firm.

 

15.                Customers of a firm:
A. want income volatility for the firm because high income will allow the firm to spend more on innovation and improve the products that customers obtain from the firm.
B. want income volatility for the firm so that the customers can negotiate better deals with the firm.
C. are generally not concerned with the income stability or volatility of the firm.
D. want income stability for the firm so that they can be assured of a reliable supply of products from the firm.

 

 

16.                A reason for a firm to engage in hedging that does not arise within the firm is:
A. market inefficiencies that provide profitable opportunities through hedging.
B. regulatory requirements that favor firms that hedge against various exposures.
C. the possibility that currency fluctuations may affect future obligations of the firm.
D. that hedging may make the firm less attractive to another firm that is considering a hostile takeover of the firm.

 

17.                The facts that individual currency standard deviation is usually 5% to 15 % and that the standard deviation for other commodities used by a firm is usually much larger indicates that:
A. currency risks are the most important risk that any firm faces.
B. risks exist no matter what a firm does and efforts to reduce risks are generally ineffective.
C. currency risks are not as important to a firm as commodity price risks.
D. standard deviation is not a proper measure of risks faced by a firm.

 

18.                Studies have shown that firms in industries producing primary products:
A. hedge more than firms in other industries.
B. hedge while firms in most other industries do not hedge very often.
C. hedge much less than firms in other industries.
D. hedge to the same extent as firms in other industries.

 

19.                Most MNCs:
A. are large companies but do not engage in hedging.
B. are large companies and engage in hedging.
C. are not large companies but do engage in hedging.
D. are not large companies and do not engage in hedging.

 

20.                “On Balance Sheet Commitments” are:
A. items such as receivables that constitute a significant part of a firm’s transaction exposure.
B. items such as inventory that is not involved in a firm’s transaction exposure.
C. items in connection with which the firm has some liability.
D. obligations owed by a firm to another firm that depends on currency values at a particular time.

 

 

21.                In the context of international corporate finance, “repatriation” refers to:
A. repayment of funds owed to creditors in foreign countries.
B. payment of funds to foreign governments as compensation for the privilege of operating in those countries.
C. the recovery of investments made in foreign firms.
D. cash flows between parent and subsidiary corporations in the form of dividends, interest and fees.

 

22.                Hedging involves taking positions in derivative instruments that are ___________ a firm’s currency position.
A. the same as
B. equal to
C. opposite to
D. not related to

 

23.                When a firm’s currency position produces losses, if its hedge position is effective:
A. its derivatives will produce offsetting gains.
B. its derivative position will not be affected.
C. it can use those losses to offset taxable income from operations.
D. its on-balance sheet commitments will be reduced.

 

24.                A short position in a currency is:
A. a contract to buy that currency at some point in the future.
B. a contract to sell that currency at some point in the future.
C. an option to buy that currency at some point in the future.
D. an option to sell that currency at some point in the future.

 

25.                Firms select their hedging instruments based on:
A. the instruments sensitivity to the underlying currency.
B. the cost of the instruments.
C. the amount of exposure being hedged.
D. the availability of alternative choices.

 

 

26.                With respect to selecting hedging instruments, “matching” refers to:
A. how closely the cost of the hedging instrument relates to the amount involved in the exposure being hedged.
B. the relationship between the firm seeking to hedge an exposure and the firm offering the hedging instrument.
C. the relationship of the two countries whose currency is involved in the hedge.
D. how closely the currency and maturity of the hedging instrument lines up with the exposure being hedged.

 

27.                A symmetric hedge is a:
A. fixed hedge that locks in currency values.
B. hedge that allows a firm to gain exactly as much as it loses on the exposure being hedged.
C. flexible hedge that allows currency values to be locked only when the firm pursuing the hedge decides to use the hedge.
D. flexible hedge that allows the currency values to change until a specified date in the future.

 

28.                Symmetric hedges use __________________,while asymmetric hedges usually use _____________________.
A. options; forwards and futures
B. currency swaps; options
C. forwards and futures; options
D. options; derivatives

 

29.                When hedging economic exposures, firms often use a hedge that has a shorter term than the activity being hedged because:
A. maturity on economic exposures are often long-term and long-term hedges are expensive and involve more risk.
B. the firm wants the benefit of the hedge to mature before the economic exposure matures.
C. the maturity of the economic exposure is not known and the firm wants to be sure that the hedge is not longer than the economic exposure.
D. economic exposures are notoriously overstated and the firm wants to minimize the cost of the hedge.

 

 

30.                Forward hedges can eliminate cash flow variability:
A. in most cases.
B. to some extent.
C. only occasionally.
D. completely.

 

31.                In a forward hedge, the cash flow equals:
A. the amount of the foreign currency used in the hedge times the forward rate.
B. the amount of the currency the firm usually transacts business in times the forward rate.
C. the unhedged cash flow times the forward rate.
D. the unhedged cash flow.

 

32.                If hedging eliminates risk but results in lower cash flow than not hedging, whether a firm hedges or not depends on:
A. the anticipated changes in the exchange rate.
B. the firm’s ability to increase cash flow from other sources.
C. the firm’s risk-aversion and the firm’s reason for considering hedging.
D. the anticipated changes in the forward rate.

 

33.                Because under parity the forward and the money market hedges provide identical outcomes, money market hedges are also known as:
A. symmetrical forward hedges.
B. synthetic forward hedges.
C. matching hedges.
D. asymmetrical forward hedges.

 

34.                A purchase or sale of a foreign currency in anticipation of a future transaction is a(n):
A. money market hedge.
B. forward hedge.
C. unhedged transaction.
D. currency hedge.

 

 

35.                A potentially significant difference between using a forward hedge and a money market hedge is that the:
A. forward hedge is less risky.
B. money market hedge produces less cash flow.
C. forward hedge produces less cash flow.
D. money market hedge involves greater transaction costs.

 

36.                The purchase of an option is also known as a:
A. call.
B. put.
C. hedge.
D. match.

 

37.                Unlike the forward hedge, there are upfront cash flows related to the option premium, which means that:
A. the buyer or seller must pay a fee to buy or sell an option.
B. dealing with options always results in some loss of money.
C. money must be spent to buy the option or money is received on the sale of an option.
D. option results in the elimination of cash flow variables.

 

38.                Firms typically buy put options to hedge against:
A. payables.
B. inventory.
C. recessions.
D. receivables.

 

39.                A call option puts a limit on cash outflow and:
A. reduces risk.
B. increases risk.
C. eliminates risk.
D. increases cash inflow.

 

 

40.                In dealing with options, the strike price is:
A. the price that the parties negotiate the option price when the option is exercised.
B. the set price at which the option is exercised.
C. not relevant.
D. set by the seller of the currency subject to the option.

 

41.                A financial alternative dominates a second financial alternative, when the first alternative:
A. provides a higher cash flow for the same or lower risk compared to the second alternative.
B. costs less than the second alternative.
C. reduces the risks at all costs.
D. provides more assurance of success.

 

42.                If the maturity of a currency position and the maturity of the hedging instrument are the same, then:
A. all risk is eliminated.
B. cash inflows and cash outflows are offsetting.
C. maturities match.
D. hedging is not necessary.

 

43.                Maturities of hedging instruments and the maturity of currency exposures rarely are the same because:
A. maturities of hedging instruments are standardized and set by the exchanges where they are traded.
B. maturities of hedging instruments are not fixed and can change as circumstances change.
C. maturities of currency exposures are not fixed and can change as circumstances change.
D. the maturity of hedging instruments is not known when the hedging instruments are acquired.

 

44.                In hedging, “delta” refers to:
A. the cost involved in acquiring hedging instruments.
B. the degree of risk that a particular hedging instrument addresses.
C. the difference between hedged cash flow and unhedged cash flow.
D. the sensitivity between the hedging instrument and the underlying currency.

 

 

45.                For a US-based MNC to rely on invoice currency to reduce transaction exposure means that the firm:
A. will invoice its customers in terms of US dollars.
B. will invoice its customers in the home currency of each customer.
C. will increase its cost related to collection of amounts owed to it.
D. will not be concerned about the currency in which its receivables are expressed.

 

 

Essay Questions

46.                Why might an MNC have a currency exposure as the result of its business transactions?

 

 

 

 

47.                How significant is currency risk compared to other risks that an MNC might face?

 

 

 

 

48.                Why are firm managers generally considered to be risk-adverse?

 

 

 

 

 

49.                How does hedging assist a firm in reducing its currency exposure?

 

 

 

 

50.                What steps can a firm take form an operational viewpoint to mitigate the exposure that it faces as a result of its business transactions?