tb11

KirtC.Butler,MultinationalFinance,3rdedition83Chapter11ManagingTransactionExposuretoCurrencyRiskTrue/False1.Themultinationalcorporation’seconomicexposuretocurrencyriskismadeupoftransactionexposureandoperatingexposure.ANS:True.2.Transactionexposureisdefinedaschangeinthevalueofmonetary(contractual)cashflowsduetoanunexpectedchangeinexchangerates.ANS:True.3.Transactionexposuretocurrencyriskisdefinedaschangeinfinancialaccountingstatementsarisingfromunexpectedchangesincurrencyvalues.ANS:False.Transactionexposureistheexposureofmonetaryassetsandliabilities.4.Everycorporatecashflowdenominatedinaforeigncurrencyhasatransactionexposuretocurrencyrisk.ANS:True.5.Toavoidinfluencingdivisionalhedgingdecisions,thecorporatetreasuryshouldchargeoperatingdivisionsthesamepriceforacurrencyhedge(suchasaforwardcontract)regardlessofwhenthehedgeisexecuted.ANS:False.Operatingdivisionsshouldbechargedmarketpricesforcurrencyhedges.6.Abenefitofleadingandlaggingisthatitdoesnotdistortthereturnsearnedbythevariousaffiliates.ANS:False.Thisisoneofthedrawbacksofleadingandlagging.7.Transactionexposuretocurrencyriskiseasytohedgewithcurrencyforwards.ANS:True.8.Currencyoptionsarethemostpopularcurrencyhedge.ANS:False.Thecurrencyforwardcontractisthemostpopularcurrencyhedginginstrument.9.Currencyfuturesarelikecurrencyforwardsexceptthattheyaremarked-to-marketdaily.ANS:True.10.Acurrencycalloptiongivesthebuyertherighttobuyanunderlyingcurrencyatanexchangerateandonanexpirationdatethatisdeterminedbytheoptioncontract.ANS:True.11.Thesellerofacurrencycalloptionhastheobligationtodeliverthespecifiedcurrencyattheexerciseprice.ANS:True.12.Anoptionpremiumispaidbythebuyertotheselleratthetimetheoptionispurchased.ANS:True.KirtC.Butler,MultinationalFinance,3rdedition8413.Theoptionpremiumcompensatesthesellerfortheexpectedlossshouldtheoptionbeexercisedbythebuyer.ANS:True.14.Acurrencyswapisanexchangeofonecurrencyforanotherinthespotmarket.ANS:False.AcurrencyswapisanagreementtoexchangeinterestpaymentsdenominatedintwodifferentcurrenciesMultipleChoice1.Thecurrencyriskexposuregiventhemostattentionbyfinancialmanagersis____.a.economicexposureb.operatingexposurec.transactionexposured.translationexposuree.noneoftheaboveANS:C2.Geographicallydiversifiedoperationsprovideanaturalhedgeoftransactionexposuretocurrencyriskbecause____.a.operatingcostsinonecountryareunlikelytoberelatedtocostsinanothercountryb.itiseasytoreplacesalesinonecountrywithsalesfromanothercountryc.whenonecurrencyisdepreciating,anothercurrencymustbeappreciatingd.Twooftheabovee.NoneoftheaboveANS:C3.InternalmethodsofreducingtheMNC’stransactionexposuretocurrencyriskincludeeachofa)throughc)except____.a.multinationalnettingb.leadingandlaggingofintracompanytransactionsc.hedginginthecurrencyforwardmarketsd.eachoftheaboveisawaytoreducetransactionexposureinternallye.noneoftheaboveareawayofreducingtransactionexposureinternallyANS:C4.Thecorporatetreasuryshouldcharge____forhedgingthecurrencyriskexposuresofindividualbusinessunitswithinthefirm.a.historicalcostpricesc.reservationpricesb.marketpricesd.thesamepriceregardlessofwhenthetransactionsareexecutede.themostthatthedivisioncanaffordANS:B5.Marketpricesallowthetreasuryto____.a.avoidtransactionscostsoninternalhedgesb.benchmarkthecostsofinternalhedgesKirtC.Butler,MultinationalFinance,3rdedition85c.usetransferpricestominimizetheMNC’staxliabilityd.morethanoneoftheabovee.noneoftheaboveANS:B6.Thepreferredwaytohedgetransactionexposuretocurrencyriskis____.a.byoffsettingexposureswithinthefirmb.throughforwardcurrencycontractsc.throughfuturescontractsd.throughswapcontractse.noneoftheabove-exposuresshouldbeleftunhedgedANS:A7.Transactionexposuretocurrencyriskcanbeeffectivelyhedgedwithwhichofthefollowinghedginginstrumentsorstrategies?a.currencyforwardsorfuturesb.leadingandlaggingc.internationaldiversificationd.morethanoneoftheabovee.noneoftheaboveANS:D8.Internalhedgesofcurrencyriskaremostlikelytobefoundin____.a.diversifiedmultinationalcorporationsb.domesticcorporationsc.exportersd.governmentagenciese.importersANS:A9.Financialmarkethedgesworkbestfor____exposurestocurrencyrisk.a.accountingb.economicc.operatingd.transactione.translationANS:D10.Financialmarkethedgesincludeeachofa)throughd)except____.a.currencyfuturesb.currencyoptionsc.moneymarkethedgesd.currencyswapse.eachoftheabovecanformafinancialmarkethedgeofcurrencyriskANS:E11.Exposurestocurrencyriskthatareperiodic,long-term,andrecurringinnatureareusuallybesthedgedwith____.KirtC.Butler,MultinationalFinance,3rdedition86a.currencycompactsb.currencyfuturesc.currencyoptionsd.currencystraddlese.currencyswapsANS:E12.Themostpopularinstrumentforhedgingcurrencyriskisa____.a.currencyforwardb.currencyfuturesc.moneymarkethedged.currencyoptione.currencyswapANS:A13.A“disasterhedge”againstadversecurrencymovementscanbeobtainedwitha____.a.currencyforwardb.currencyfuturec.moneymarkethedged.currencyoptione.currencyswapANS:DProblemsExhibit11.1BerndlivesinBerlinandusestheeuroashiscurrencyofdenomination.Berndhasanaccountspayablebalanceof$10milliondueinthreemonths.Thes