Question 1

Under FASB 52:

Accepted Answer

Under FASB 52, translation gains and losses are included in Accumulated Other Comprehensive Income within stockholder's equity, and not in the reported net income.

Question 2

A set of currency cash inflows is more volatile if the correlations are low.

Accepted Answer

Low correlations between the components of a set of currency cash inflows imply that the inflows do not move in tandem, which can actually reduce overall volatility through diversification.

Question 3

Diz Co. is a U.S.-based MNC with net cash inflows of euros and net cash inflows of Swiss francs. These two currencies are highly correlated in their movements against the dollar. Yanta Co. is a U.S.-based MNC that has the same level of net cash flows in these currencies as Diz Co. except that its euros represent net cash outflows. Which firm has a higher exposure to exchange rate risk?

Accepted Answer

Diz Co. has higher exposure to exchange rate risk because it has net cash inflows in both euros and Swiss francs, which are highly correlated. This means that if the dollar strengthens, both inflows could decrease in value simultaneously, increasing the firm's exposure to exchange rate fluctuations.

Question 4

According to the text, currency variability levels ____ perfectly stable over time, and currency correlations ____ perfectly stable over time.

Accepted Answer

The text states that currency variability levels are not perfectly stable over time, meaning they are variable. It also states that currency correlations are not perfectly stable over time, meaning they are also variable. Therefore, choice C is the correct answer.

Question 5

Economic exposure can affect:

Accepted Answer

Economic exposure can affect both MNCs and purely domestic firms because it refers to the risk of changes in exchange rates affecting the value of the firm's assets or liabilities denominated in foreign currencies. Both types of firms may have exposure to foreign currencies through trade, investments, or financing activities. MNCs may have greater exposure due to their multinational operations, but purely domestic firms may also be affected if they rely on imports or exports or compete with foreign firms.

Question 6

Economic exposure refers to:

Accepted Answer

Economic exposure refers to the impact of exchange rate fluctuations on a firm's future cash flows from its international operations. Therefore, option D is the correct choice. Option A refers to transaction exposure, option B refers to market exposure, option C refers to accounting exposure, and option E refers to macroeconomic exposure.

Question 7

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

Accepted Answer

The answer of Which of the following operations benefits from...

Question 8

Assume that the British pound and Swiss franc are highly correlated. A U.S. firm anticipates the equivalent of $1 million cash outflows in francs and the equivalent of $1 million cash outflows in pounds. During a ____ cycle, the firm is ____ affected by its exposure.

Accepted Answer

During a strong dollar cycle, the value of foreign currencies like the British pound and Swiss franc decreases relative to the dollar. This means the firm would need fewer dollars to meet its obligations in these currencies, thus being favorably affected by its exposure.

Question 9

Translation exposure reflects:

Accepted Answer

Translation exposure refers to the impact of currency fluctuations on a firm's financial statements. This occurs when a company has subsidiaries or operations in foreign countries, and the financial statements of those subsidiaries or operations are translated into the parent company's reporting currency. This translation can result in gains or losses due to changes in exchange rates.

Question 10

Generally, MNCs with less foreign costs than foreign revenues will be ____ affected by a ____ foreign currency.

Accepted Answer

MNCs with less foreign costs than foreign revenues benefit when the foreign currency strengthens because their revenues in foreign currency terms increase more than their costs when converted back to their home currency.

Question 11

Magent Co. is a U.S. company that has exposure to the Swiss francs (SF) and Danish kroner (DK). It has net inflows of SF200 million and net outflows of DK500 million. The present exchange rate of the SF is about $.40 while the present exchange rate of the DK is $.10. Magent Co. has not hedged these positions. The SF and DK are highly correlated in their movements against the dollar. If the dollar weakens, then Magent Co. will:

Accepted Answer

Since the SF net inflows exceed the DK net outflows, a weakening of the dollar would increase the dollar value of Magent Co.'s SF position more than it would decrease the dollar value of its DK position. Therefore, Magent Co. would benefit from a weaker dollar in this scenario.

Question 12

A firm produces goods for which substitute goods are produced in all countries. Depreciation of the firm's local currency should:

Accepted Answer

Depreciation of the local currency makes the firm's goods cheaper for foreign buyers, potentially increasing exports, and makes foreign goods more expensive, potentially reducing imports. Thus, none of the options correctly describe the effects of currency depreciation.

Question 13

A U.S. MNC has the equivalent of $1 million cash outflows in each of two highly negatively correlated currencies. During ____ dollar cycles, cash outflows are ____.

Accepted Answer

When the dollar is weak, the value of foreign currencies relative to the dollar increases, making the cash outflows in those currencies more expensive in dollar terms. However, because the currencies are highly negatively correlated, when one currency strengthens (making the outflow more expensive), the other weakens (making the outflow less expensive), which tends to stabilize the overall cash outflow in dollar terms.

Question 14

Which of the following operations benefit(s) from depreciation of the firm's local currency?

Accepted Answer

Depreciation of the firm's local currency benefits operations that involve holding assets or receiving revenues in a stronger foreign currency. Investing in foreign bank accounts denominated in foreign currencies prior to the depreciation of the local currency would result in gains when converting back to the now weaker local currency.

Question 15

When the dollar strengthens, the reported consolidated earnings of U.S.-based MNCs are ____ affected by translation exposure. When the dollar weakens, the reported consolidated earnings are ____ affected.

Accepted Answer

When the dollar strengthens, foreign earnings translate into fewer dollars, negatively impacting reported earnings. Conversely, when the dollar weakens, foreign earnings translate into more dollars, positively impacting reported earnings.

Question 16

A firm produces goods for which substitute goods are produced in all countries. Appreciation of the firm's local currency should:

Accepted Answer

The answer of A firm produces goods for which substitute...

Question 17

Jacko Co. is a U.S.-based MNC with net cash inflows of euros and net cash inflows of Sunland francs. These two currencies are highly negatively correlated in their movements against the dollar. Kriner Co. is a U.S.-based MNC that has the same exposure as Jacko Co. in these currencies, except that its Sunland francs represent cash outflows. Which firm has a high exposure to exchange rate risk?

Accepted Answer

Kriner Co. has a higher exposure to exchange rate risk because its cash outflows are in Sunland francs, which are negatively correlated with the euro. If the euro strengthens against the dollar, Jacko Co. will benefit from its net cash inflows of euros, which will partially offset any losses from its net cash inflows of Sunland francs. However, Kriner Co. will suffer losses from both its net cash outflows of Sunland francs and its exposure to the euro through its net cash inflows of euros. Therefore, Kriner Co. has a higher exposure to exchange rate risk than Jacko Co.

Question 18

Assume that your firm is an importer of Mexican chairs denominated in pesos. Your competition is mainly U.S. producers of chairs. You wish to assess the relationship between the percentage change in its stock price (SP_t) and the percentage change in the peso's value relative to the dollar (PESO_t). SP_t is the dependent variable. You apply the regression model to an earlier subperiod and a more recent subperiod. In the recent subperiod, you increased your importing volume. You should expect that the regression coefficient in the PESO_t variable would be ____ in the first subperiod and ____ in the second subperiod.

Accepted Answer

In both subperiods, a depreciation of the peso (a negative change in PESO_t) would make Mexican chairs cheaper, potentially increasing your firm's competitiveness and stock price, leading to a negative relationship in both periods.

Question 19

If a U.S. firm's cost of goods sold exposure is much greater than its sales exposure in Switzerland, there is a ____ overall impact of the Swiss franc's depreciation against the dollar on ____.

Accepted Answer

When a U.S. firm's cost of goods sold (COGS) exposure is much greater than its sales exposure in Switzerland, a depreciation of the Swiss franc against the dollar means that the cost of goods sold in francs becomes cheaper when converted back to dollars, while the impact on sales revenue is less pronounced. This leads to a higher gross profit margin, hence a positive impact on gross profit.

Question 20

Transaction exposure reflects:

Accepted Answer

Transaction exposure specifically refers to the risk that a firm's international contractual transactions will be affected by changes in exchange rates, impacting the value of those transactions.

Quiz 10: Measuring Exposure to Exchange Rate Fluctuations

Under FASB 52:

A set of currency cash inflows is more volatile if the correlations are low.

According to the text, currency variability levels perfectly stable over time, and currency correlations perfectly stable over time.

Economic exposure can affect:

Economic exposure refers to:

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

Assume that the British pound and Swiss franc are highly correlated. A U.S. firm anticipates the equivalent of $1 million cash outflows in francs and the equivalent of $1 million cash outflows in pounds. During a cycle, the firm is affected by its exposure.

Translation exposure reflects:

Generally, MNCs with less foreign costs than foreign revenues will be affected by a foreign currency.

A firm produces goods for which substitute goods are produced in all countries. Depreciation of the firm's local currency should:

A U.S. MNC has the equivalent of $1 million cash outflows in each of two highly negatively correlated currencies. During dollar cycles, cash outflows are .

Which of the following operations benefit(s) from depreciation of the firm's local currency?

When the dollar strengthens, the reported consolidated earnings of U.S.-based MNCs are affected by translation exposure. When the dollar weakens, the reported consolidated earnings are affected.

A firm produces goods for which substitute goods are produced in all countries. Appreciation of the firm's local currency should:

If a U.S. firm's cost of goods sold exposure is much greater than its sales exposure in Switzerland, there is a overall impact of the Swiss franc's depreciation against the dollar on .

Transaction exposure reflects: