Exam Study Guide: Measuring Exchange Rate Fluctuations (2024/2025), Exams of Economics

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Exchange Rate Fluctuations.

Detailed Updated Guide 2024/

Exchange Rate Fluctuations.

Detailed Updated Guide 2024/

1. Translation exposure reflects: a. the exposure of a firm's international contractual transactions to exchange rate fluctuations. b. the exposure of a firm's local currency value to transactions between foreign exchange traders. c. the exposure of a firm's financial statements to exchange rate fluctuations. d. the exposure of a firm's cash flows to exchange rate fluctuations.

ANS: C PTS: 1

2. Transaction exposure reflects: a. the exposure of a firm's international contractual transactions to exchange rate fluctuations. b. the exposure of a firm's local currency value to transactions between foreign exchange traders. c. the exposure of a firm's financial statements to exchange rate fluctuations. d. the exposure of a firm's cash flows to exchange rate fluctuations.

ANS: A PTS: 1

3. Economic exposure refers to: a. the exposure of a firm's international contractual transactions to exchange rate fluctuations. b. the exposure of a firm's local currency value to transactions between foreign exchange traders. c. the exposure of a firm's financial statements to exchange rate fluctuations. d. the exposure of a firm's cash flows to exchange rate fluctuations. e. the exposure of a country's economy (specifically GNP) to exchange rate fluctuations.

ANS: D PTS: 1

4. 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? a. Diz Co. b. Yanta Co. c. the firms have about the same level of exposure. d. neither firm has any exposure.

ANS: A PTS: 1

5. 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? a. Jacko Co. b. Kriner Co. c. the firms have about the same level of exposure. d. neither firm has any exposure.

Exchange Rate Fluctuations.

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d. weak dollar; favorably

ANS: A PTS: 1

12. 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. a. weak; somewhat stable b. weak; favorably affected c. weak; adversely affected d. none of the above

ANS: A PTS: 1

13. 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: a. benefit, because the dollar value of its SF position exceeds the dollar value of its DK position. b. benefit, because the dollar value of its DK position exceeds the dollar value of its SF position. c. be adversely affected, because the dollar value of its SF position exceeds the dollar value of its DK position. d. be adversely affected, because the dollar value of its DK position exceeds the dollar value of its SF position.

ANS: A PTS: 1

14. Generally, MNCs with less foreign costs than foreign revenues will be affected by a foreign currency. a. favorably; stronger b. not; stronger c. favorably; weaker d. not; weaker e. B and D

ANS: A PTS: 1

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. a. favorably; favorably affected but by a smaller degree b. favorably; favorably affected by a higher degree c. unfavorably; favorably affected d. favorably; unfavorably affected

ANS: C PTS: 1

Exchange Rate Fluctuations.

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16. A firm produces goods for which substitute goods are produced in all countries. Appreciation of the firm's local currency should: a. increase local sales as it reduces foreign competition in local markets. b. increase the firm's exports denominated in the local currency. c. increase the returns earned on the firm's foreign bank deposits. d. increase the firm's cash outflow required to pay for imported supplies denominated in a foreign currency. e. none of the above

ANS: E PTS: 1

17. A firm produces goods for which substitute goods are produced in all countries. Depreciation of the firm's local currency should: a. decrease local sales as foreign competition in local markets is reduced. b. decrease the firm's exports denominated in the local currency. c. decrease the returns earned on the firm's foreign bank deposits. d. decrease the firm's cash outflow required to pay for imported supplies denominated in a foreign currency. e. none of the above

ANS: E PTS: 1

18. 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. a. positive; interest expenses b. positive; gross profit c. negative; gross profit d. negative; interest expenses

ANS: B PTS: 1

19. 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 (SPt) and the percentage change in the peso's value relative to the dollar (PESOt). SPt 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 PESOt variable would be in the first subperiod and in the second subperiod. a. negative; positive b. positive; positive c. positive; negative d. negative; negative

ANS: D PTS: 1

20. A set of currency cash inflows is more volatile if the correlations are low. a. True b. False

ANS: F PTS: 1

Exchange Rate Fluctuations.

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b. Economic c. Translation d. None of the above

ANS: A PTS: 1

26. 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. a. negatively; high b. negatively; low c. positively; low d. none of the above

ANS: B PTS: 1

27. If an MNC has a net inflow in one currency and a net outflow of about the same amount in another currency, then the MNCs' transaction exposure is if the two currencies are correlated. a. high; positively b. low; negatively c. high; negatively d. none of the above

ANS: C PTS: 1

Exhibit 10- Cerra Co. 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. Use the value-at-risk (VAR) method based on a 95% confidence level for the following question(s).

28. Refer to Exhibit 10-1. What is the maximum one-day loss if the expected percentage change of the euro tomorrow is 0.5%? a. (^) 0.5% b. (^) 2.2% c. (^) 1.5% d. (^) 1.2%

ANS: D SOLUTION: 0.5%  (1.65  1%) = 1.2%

PTS: 1

29. Refer to Exhibit 10-1. 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 $1.01. a. (^) $75,750. b. (^) $60,600. c. (^) $111,100. d. (^) $25,250.

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ANS: B

SOLUTION: 0.5%  (1.65  1%) = 1.2%

PTS: 1

30. The maximum one-day loss computed for the value-at-risk (VAR) method does not depend on: a. the expected percentage change in the currency for the next day. b. the standard deviation of the daily percentage changes in the currency over a previous period. c. the current level of interest rates. d. the confidence level used.

ANS: C PTS: 1

Exhibit 10- Volusia, Inc. is a U.S.-based exporting firm that expects to receive payments denominated in both euros and Canadian dollars in one month. Based on today's spot rates, the dollar value of the funds to be received is estimated at $500,000 for the euros and $300,000 for the Canadian dollars. Based on data for the last fifty months, Volusia estimates the standard deviation of monthly percentage changes to be 8 percent for the euro and 3 percent for the Canadian dollar. The correlation coefficient between the euro and the Canadian dollar is 0.30.

31. Refer to Exhibit 10-2. What is the portfolio standard deviation? a. 3.00%. b. 5.44%. c. 17.98%. d. none of the above

ANS: B SOLUTION:

PTS: 1

32. Refer to Exhibit 10-2. Assuming an expected percentage change of 0 percent for each currency during the next month, what is the maximum one-month loss of the currency portfolio? Use a 95 percent confidence level and assume the monthly percentage changes for each currency are normally distributed. a. (^) 9.00%. b. (^) 30.00%. c. 5.00%. d. none of the above

ANS: A

Exchange Rate Fluctuations.

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38. Assume that Mill Corporation, a U.S.-based MNC, has applied the following regression model to estimate the sensitivity of its cash flows to exchange rate movements:

PCFt = a 0 + a 1 et +  t

where the term on the left-hand side is the percentage change in inflation-adjusted cash flows measured in the firm's home currency over period t , and et is the percentage change in the exchange rate of the currency over period t. The regression model estimates a coefficient of a 1 of 2. This indicates that: a. if the foreign currency appreciates by 1%, Mill's cash flows will decline by 2%. b. if the foreign currency appreciates by 1%, Mill's cash flows will decline by .2%. c. if the foreign currency depreciates by 1%, Mill's cash flows will increase by 2%. d. if the foreign currency depreciates by 1%, Mill's cash flows will decline by 2%. e. none of the above

ANS: B PTS: 1

39. is (are) not a determinant of translation exposure. a. The MNC's degree of foreign involvement b. The locations of foreign subsidiaries c. The local (domestic) earnings of the MNC d. The accounting methods used

ANS: C PTS: 1

40. The following regression model was run by a U.S.-based MNC to determine its degree of economic exposure as it relates to the Australian dollar and Sudanese dinar (SDD):

PCFt = a 0 + a 1 et +  t

where the term on the left-hand side is the percentage change in inflation-adjusted cash flows measured in the firm's home currency over period t , and et is the percentage change in the exchange rate of the currency over period t. The regression was run over two subperiods for each of the two currencies, with the following results:

Currency

Regression Coefficient ( a 1 ) Earlier Subperiod

Regression Coefficient ( a 1 ) Recent Subperiod Australian dollar (A$) .80. Sudanese dinar (SDD) .20.

Based on these results, which of the following statements is probably not true? a. The MNC was more sensitive to movements in the Australian dollar than in the dinar in the earlier subperiod. b. The MNC was more sensitive to movements in the dinar than in the Australian dollar in the more recent subperiod.

Exchange Rate Fluctuations.

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c. The MNC probably had more outflows than inflows in Australian dollars in the earlier subperiod. d. The MNC probably had more inflows than outflows denominated in dinar in the more recent subperiod. e. All of the above are true.

ANS: C PTS: 1

41. 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 .7. Based on this information, the standard deviation of this two-currency portfolio is approximately: a. 5.13%. b. 2.63%. c. 4.33%. d. 5.55%.

ANS: A SOLUTION:

PTS: 1

42. Consider an MNC that is exposed to the Bulgarian lev (BGL) and the Romanian leu (ROL). 30% of the MNC's funds are lev and 70% are leu. The standard deviation of exchange movements is 10% for lev and 15% for leu. The correlation coefficient between movements in the value of the lev and the leu is .85. Based on this information, the standard deviation of this two-currency portfolio is approximately: a. 17.28%. b. 13.15%. c. 14.50%. d. 12.04%.

ANS: B SOLUTION:

PTS: 1

43. One argument why exchange rate risk is irrelevant to corporations is that shareholders can deal with this risk individually. a. True b. False

ANS: T PTS: 1

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51. An MNC can avoid translation exposure if its earnings are not remitted by the foreign subsidiary to the parent. a. True b. False

ANS: F PTS: 1

52. Assume a regression model in which the dependent variable is the firm's stock price percentage change, and the independent variable is percentage change in the foreign currency. The coefficient is negative. This implies that the company's stock price increases if the foreign currency appreciates. a. True b. False

ANS: F PTS: 1

53. A company may become more exposed or sensitive to an individual currency's movements over time for several reasons, including a reduction in hedging, a greater involvement in the foreign country, or an increased use of the foreign currency. a. True b. False

ANS: T PTS: 1

54. Regression analysis cannot be used to assess the sensitivity of a company's performance to economic conditions because economic conditions are unpredictable. a. True b. False

ANS: T PTS: 1

55. 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. a. True b. False

ANS: T PTS: 1

56. Firms with more in foreign costs than in foreign revenues will be favorably affected by a stronger foreign currency. a. True b. False

ANS: F PTS: 1

57. The exposure of an MNC's consolidated financial statements to exchange rate fluctuations is known as transaction exposure. a. True b. False

ANS: F PTS: 1

Exchange Rate Fluctuations.

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58. In general, translation exposure is larger with MNCs that have a larger proportion of earnings generated by foreign subsidiaries. a. True b. False

ANS: T PTS: 1

59. A reduction in hedging will probably reduce transaction exposure. a. True b. False

ANS: F PTS: 1

60. The VAR method presumes that the distribution of exchange rate movements is normal. a. True b. False

ANS: T PTS: 1

61. The VAR method assumes that the volatility (standard deviation) of exchange rate movements changes over time. a. True b. False

ANS: F PTS: 1

62. If exchange rate movements are less volatile in the past than in the future, the estimated maximum expected loss derived from the VAR method will be underestimated. a. True b. False

ANS: T PTS: 1

63. Some MNCs are subject to economic exposure without being subject to transaction exposure. a. True b. False

ANS: T PTS: 1

64. If positions in a specific currency among an MNC's subsidiaries offset each other, the decision by one subsidiary to hedge its position in that currency would increase the MNC's overall exposure. a. True b. False

ANS: T PTS: 1

65. Vada, Inc. exports computers to Australia invoiced in U.S. dollars. Its main competitor is located in Japan. Vada is subject to: a. economic exposure.

Exchange Rate Fluctuations.

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70. If a U.S. firm's sales in Australia are much greater than its cost of goods sold in Australia, the appreciation of the Australian dollar has a impact on the firm's. a. positive; interest expenses b. positive; gross profit c. negative; interest expenses d. negative; gross profit

ANS: B PTS: 1

71. U.S. based Majestic Co. sells products to U.S. consumers and purchases all of materials from U.S. suppliers. Its main competitor is located in Belgium. Majestic Co. is subject to: a. economic exposure. b. translation exposure. c. transaction exposure. d. no exposure to exchange rate fluctuations.

ANS: A PTS: 1

72. Vermont Co. has one foreign subsidiary. Its translation exposure is directly affected by each of the following, except: a. the interest rate in the country of the subsidiary. b. proportion of business conducted by the subsidiary. c. its accounting method. d. the exchange rate movements of the subsidiary's currency.

ANS: A PTS: 1

73. Treck Co. expects to pay €200,000 in one month for its imports from Greece. It also expects to receive €250,000 for its exports to Italy in one month. Treck Co. estimates the standard deviation of monthly percentage changes of the euro to be 3 percent over the last 40 months. 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-month loss in dollars if the expected percentage change of the euro during next month is 2%? Assume that the current spot rate of the euro (before considering the maximum one-month loss) is $1.23. a. (^) $38, b. (^) $21, c. (^) $17, d. (^) $4,

ANS: D SOLUTION: (^) Net exposure = €250,000  €200,000 = €50, Maximum one-month loss: 2%  (1.65  3%) = 6.95% $1.23  (.0695%)  €50,000 = $4,

PTS: 1

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74. Jensen Co. expects to pay €50,000 in one month for its imports from France. It also expects to receive €200,000 for its exports to Belgium in one month. Jensen estimates the standard deviation of monthly percentage changes of the euro to be 2.5 percent over the last 50 months. Assume that these percentage changes are normally distributed. Using the value-at-risk (VAR) method based on a 97.5% confidence level, what is the maximum one month loss in dollars if the expected percentage change of the euro during next month is 2%? Assume that current spot rate of the euro (before considering the maximum one-month loss) is $1.35. a. (^) $4, b. (^) $7, c. (^) $5, d. (^) $1,

ANS: C SOLUTION: (^) Net exposure = €200,000  €50,000 = €150, Maximum one-month loss: 2%  (1.96  2.5%) = 2.9% €150,000  $1.35  (0.029) = $5,

PTS: 1

75. Lazer Co. is a U.S. firm that exports computers to Belgium invoiced in euros and to Italy invoiced in dollars. Additionally, Lazer Co. has a subsidiary in Korea that produces computers in South Korea and sells them there. Lazer also has competitors in different countries. Lazer Co. is subject to: a. transaction exposure. b. economic exposure. c. translation exposure. d. all of the above.

ANS: D PTS: 1

76. Lampon Co. is a U.S. firm that has a subsidiary in Hong Kong that produces light fixtures and sells them to Japan, denominated in Japanese yen. Its subsidiary pays all of its expenses, including the cost of goods sold, in U.S. dollars. The Hong Kong dollar is pegged to the U.S. dollar. If the Japanese yen appreciates against the U.S. dollar, the Hong Kong subsidiary's revenue will , and its expenses will. a. increase; decrease b. decrease; remain unchanged c. decrease; increase d. increase; remain unchanged

ANS: D PTS: 1

77. Assume that the Japanese yen is expected to depreciate substantially over the next year. The U.S.-based MNC has a subsidiary in Japan, where its costs exceed revenues. The overall value of MNC will because of the yen's depreciation. a. decrease b. increase c. remain unchanged d. A and C are possible

ANS: B PTS: 1

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85. Purely domestic firms are never affected by economic exposure. a. True b. False

ANS: F PTS: 1

86. U.S. exporters may not necessarily benefit from weak-dollar periods if foreign competitors are willing to reduce their profit margin. a. True b. False

ANS: T PTS: 1

87. Firms with more foreign costs than foreign revenues will generally be favorably affected by a stronger foreign currency. a. True b. False

ANS: F PTS: 1

88. Translation exposure affects an MNC's cash flows. a. True b. False

ANS: F PTS: 1

89. Since earnings can affect stock prices, many MNCs are concerned about translation exposure. a. True b. False

ANS: T PTS: 1

90. A company may become more exposed or sensitive to an individual currency's movements over time for several reasons, including a reduction in hedging, a greater involvement in the foreign country, or an increased use of the foreign currency. a. True b. False

ANS: T PTS: 1

91. Which of the following is not a form of exposure to exchange rate fluctuations? a. Transaction exposure b. Credit exposure c. Economic exposure d. Translation exposure

ANS: B PTS: 1

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92. Which of the following is not true regarding currency correlations? a. Two highly positively correlated currencies act almost as if they are the same currency. b. If two inflow currencies are highly positively correlated transaction exposure is somewhat offset. c. If two inflow currencies are negatively correlated transaction exposure is somewhat offset. d. If two currencies, one an inflow currency and the other an outflow currency, are highly positively correlated, transaction exposure is somewhat offset.

ANS: B PTS: 1

93. If the U.S. dollar appreciates, a. an MNC's U.S. sales will probably decrease. b. an MNC's exports denominated in U.S. dollars will probably increase. c. an MNC's interest owed on foreign funds borrowed will probably increase. d. an MNC's exports denominated in foreign currencies will probably increase. e. all of the above

ANS: A PTS: 1

94. Which of the following is not true regarding economic exposure? a. Even purely domestic firms can be affected by economic exposure. b. In general, depreciation of the firm's local currency causes a decrease in both cash inflows and outflows. c. The degree of economic exposure will likely be much greater for a firm involved in international business than for a purely domestic firm. d. The impact of a change in the local currency on inflow and outflow variables can sometimes be indirect and therefore different from what is expected. e. All of the above are true.

ANS: B PTS: 1