Question 1

When a company receives a USD 10 million payment for export goods on the same day as it pays USD 10 million for imports,this is called a/an:

Accepted Answer

This is called a natural hedge, as the company's imports and exports are balancing each other out in terms of currency exchange rates, providing a natural hedge against currency fluctuations.

Question 2

After assessing the risk of the various exposures,a company decides to take a money market hedge.The general principle of a money market hedge is to:

Accepted Answer

A money market hedge involves taking a position in the money market that offsets the future cash flow of the exposed transaction, effectively locking in the exchange rate.

Question 3

Companies that operate in an international market place are faced with different FX risk exposures.These are accounting,translation and transaction risk.

Accepted Answer

The FX risks are economic, transaction, translation and operational.

Question 4

Which of the following are commonly used by companies to manage foreign exchange risk?

Accepted Answer

Companies commonly use money market hedges, foreign currency hedges, and internal hedges to manage foreign exchange risk. Money market hedges involve using foreign currency-denominated securities that have a maturity matching the company's exposure. Foreign currency hedges involve using financial instruments like forward contracts, futures, and options to hedge foreign exchange risk. Internal hedges involve adjusting the company's internal operations to minimize foreign exchange risk, for example, by invoicing customers in the local currency and hedging translation exposure through centralizing accounting functions.

Question 5

When a company uses the internal foreign exchange hedging technique and changes the timing of a cash flow so it occurs earlier than the original agreed date,this is called:

Accepted Answer

When a company uses the internal foreign exchange hedging technique and changes the timing of a cash flow so it occurs earlier than the original agreed date, it is referred to as leading.

Question 6

Consider these five statements:
i.If an Australian business decides to hedge a USD receivable at time t + 3,it would hedge through a forward contract in which it sells the AUD forward for t + 3.
ii.An Australian exporter with a USD receivable would be hedging through a money market hedge if it borrows USD today and repays the loan on the day on which the USDs are received from the payments of the export account receivable.
iii.If an Australian company borrows through an offshore sale of AUD-denominated bonds in the eurobond market,it is not exposed to FX risk.
iv.'Internal' hedging techniques may save a company the costs incurred in using 'market-based' hedging techniques,but they have recognisable costs as well.
v.A net payable in one currency and a net payable in another currency is a relatively low-risk set of exposures if the amounts and timing are identical,and the correlation coefficient between the two currencies is -0.99.
Which of the following are correct?

Accepted Answer

The answer of Consider these five statements:
i.If an Australian business...

Question 7

An Australian company has contracted to buy a piece of machinery produced in Japan,with delivery in six months and payment to be made in Japanese yen.How can this company reduce its foreign exchange risk?

Accepted Answer

The answer of An Australian company has contracted to buy...

Question 8

If a company has a YEN 1 000 000 account receivable in three months and it expects the AUD to depreciate by the time of payment,a reasonable strategy would be to:

Accepted Answer

The answer of If a company has a YEN 1...

Question 9

An Australian company borrowing Japanese yen will benefit in which of the following situations?

Accepted Answer

If the AUD appreciates or the Japanese yen depreciates, the Australian company will benefit from lower repayment costs because they will be able to convert fewer AUD into Japanese yen to pay back the loan. If the situation were reversed and the AUD depreciated or the Japanese yen appreciated, the Australian company would have to convert more AUD to repay the loan, resulting in higher repayment costs.

Question 10

An exporter increasing its prices by 5% as a result of examining the risk of the foreign exchange rate dropping 5% is called:

Accepted Answer

Mark-up refers to the practice of increasing prices to cover potential losses or risks, such as fluctuations in foreign exchange rates.

Question 11

Operating FX exposure measures the extent to which exchange rate volatility will affect future ongoing revenues and costs.

Accepted Answer

Future ongoing revenues and costs are equivalent to the firm's future operating cash flows.

Question 12

Consider these five statements:
i.If an Australian business decides to hedge a USD receivable at time t + 3,it would hedge through a forward contract in which it sells the AUD forward for t + 3.
ii.An Australian exporter with a USD receivable would be hedging through a money market hedge if it borrows USD today and repays the loan on the day on which the USDs are received from the payments of the export account receivable.
iii.If an Australian company borrows through an offshore sale of AUD-denominated bonds in the eurobond market,it is not exposed to FX risk.
iv.'Internal' hedging techniques may save a company the costs incurred in using 'market-based' hedging techniques,but they have recognisable costs as well.
v.A net payable in one currency and a net payable in another currency is a relatively low-risk set of exposures if the amounts and timing are identical,and the correlation coefficient between the two currencies is -0.99.
How many of these statements are true and how many are false?

Accepted Answer

The answer of Consider these five statements:
i.If an Australian business...

Question 13

One of the main risk management techniques to manage accounting exposure is a:

Accepted Answer

A balance sheet hedge is specifically used to manage accounting exposure by matching foreign currency assets and liabilities to minimize the impact of exchange rate fluctuations on financial statements.

Question 14

Which of the following are strategies used to manage transaction exposure?

Accepted Answer

All of the given answers (A, B, C) are strategies used to manage transaction exposure. Leading and lagging foreign exchange transactions involve adjusting the timing of payments and receipts to take advantage of favorable exchange rate movements. Buying or selling foreign exchange in the forward market allows firms to lock in exchange rates for future transactions. Borrowing in foreign currency markets while using foreign currency receivables as collateral is a way to hedge against exchange rate fluctuations. All of these strategies can be used to manage transaction exposure.

Question 15

All of the following are internal hedging techniques for foreign exchange exposure,except:

Accepted Answer

Using a swap is not an internal hedging technique; it is an external hedging technique that involves a contract with a financial institution or another party. Internal hedging techniques are actions that a company can take on its own, without needing to enter into contracts with external parties.

Question 16

Which of the following about transaction exposure is NOT correct?

Accepted Answer

A correlation coefficient of 0.96 indicates a very high positive correlation between the two currencies and therefore the company does not have a natural hedge.

Question 17

A company wishes to obtain a loan denominated in yen but considers the US market to offer better terms.How can the company accomplish this?

Accepted Answer

The company can accomplish this by borrowing dollars in the US, where it finds better terms, then exchanging those dollars for yen to meet its needs. To manage the currency risk associated with this transaction, the company can arrange a currency swap, which will allow it to exchange the principal and interest payments on the loan from dollars to yen, matching its desired currency exposure.

Question 18

Which of the following statements is correct?

Accepted Answer

The answer of Which of the following statements is correct?
...

Question 19

If a company has a EUR 100 000 account payable in three months and it expects the AUD to appreciate by the time of payment,a reasonable strategy would be to:

Accepted Answer

Leading the payment cash flow means paying the account payable earlier, which would be beneficial if the AUD is expected to appreciate, as it would cost less in AUD terms to settle the EUR 100,000 payable now rather than later.

Question 20

A Singapore-based manufacturing company that exports to a number of overseas countries,often through its subsidiary companies,is investigating alternative 'internal' hedging techniques to manage its foreign exchange risk exposures.All of the following risk management techniques are 'internal' hedging techniques,except:

Accepted Answer

Invoicing in foreign currencies is an 'external' hedging technique as it involves a contractual agreement with the buyer to transact in a foreign currency. The other options, creating a natural hedge, diversification of currencies, and leading and lagging cash flows, are all 'internal' hedging techniques as they involve managing foreign exchange risk exposures through internal operational and financial activities.

Quiz 17: Foreign Exchange: Risk Identification and Management