International Financial Management Study Set 9

Business

Quiz 10 :

Measuring Exposure to Exchange Rate Fluctuations

Quiz 10 :

Measuring Exposure to Exchange Rate Fluctuations

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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 0.7. Based on this information, the standard deviation of this two-currency portfolio is approximately:
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A

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Which of the following operations benefits from depreciation of the firm's local currency?
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C

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Transaction exposure reflects:
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A

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A high correlation between two currencies would be desirable for achieving low exchange rate risk if one is an inflow currency and the other is an outflow currency.
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A firm produces goods for which substitute goods are produced in all countries. Depreciation of the firm's local currency should:
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Translation exposure is less of a concern when earnings are not remitted by the subsidiary to the parent.
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Economic exposure can affect:
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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 ____.
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One argument for exchange rate irrelevance is that:
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If the pound appreciates:
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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?
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A firm's transaction exposure in any foreign currency is based solely on the size of its open position in that currency.
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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:
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Regression analysis cannot be used to assess the sensitivity of a company's performance to economic conditions because economic conditions are unpredictable.
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When the euro strengthens, the reported consolidated earnings of euro-based MNCs are ____ affected by translation exposure. When the euro weakens, the reported consolidated earnings are ____ affected.
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Generally, MNCs with less foreign costs than foreign revenue will be ____ affected by a ____ foreign currency.
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UK exporters may not necessarily benefit from weak-dollar periods if foreign competitors are willing to reduce their profit margin.
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Cerra ltd. expects to receive 5 million euros tomorrow as a result of selling goods to the Netherlands. Cerra estimates the standard deviation of daily percentage changes of the euro to be 1 percent over the last 100 days. Assume that these percentage changes are normally distributed. Using the value-at-risk (VAR) method based on a 95% confidence level, what is the maximum one-day loss if the expected percentage change of the euro tomorrow is 0.5%?
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Cerra ltd. expects to receive 5 million euros tomorrow as a result of selling goods to the Netherlands. Cerra estimates the standard deviation of daily percentage changes of the euro to be 1 percent over the last 100 days. Assume that these percentage changes are normally distributed. Using the value-at-risk (VAR) method based on a 95% confidence level, what is the maximum one-day loss in dollars if the expected percentage change of the euro tomorrow is 0.5%? The current spot rate of the euro (before considering the maximum one-day loss) is £0.67.
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The Canadian dollar consistently appears to move almost independently of other currencies. That is it exhibits low correlations with the other currencies.
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