Change in financial accounting statements arising from unexpected changes in currency values is called ____ to currency risk.. Change in the value of contractual cash flows due to unexpe
Trang 1e none of the above
2 Change in financial accounting statements arising from unexpected changes in currency values is called to currency risk
a economic exposure
b operating exposure
c transaction exposure
d translation exposure
e none of the above
3 Change in the value of contractual cash flows due to unexpected changes in currency values
is called to currency risk
a economic exposure
b operating exposure
c transaction exposure
d translation exposure
e none of the above
4 Change in the value of noncontractual cash flows due to unexpected changes in currency values is called to currency risk
a economic exposure
b operating exposure
c transaction exposure
d translation exposure
e none of the above
5 Operating cash flows that are exposed to currency risk are affected primarily by
a changes in domestic inflation
b changes in foreign inflation
c changes in nominal exchange rates
d changes in real exchange rates
e none of the above
Trang 26 Monetary cash flows that are exposed to currency risk are affected primarily by
a changes in domestic unemployment
b changes in foreign unemployment
c changes in nominal exchange rates
d changes in real exchange rates
e none of the above
7 When goods markets are segmented from other markets, goods prices are determined
a in foreign markets
b in the global market
c in the local market
d all of the above
e none of the above
8 The classic exporter has
a both revenues and expenses that are determined globally
b both revenues and expenses that are determined locally
c revenues that are determined locally and expenses that are determined globally
d revenues that are determined globally and expenses that are determined locally
e none of the above
9 The classic importer has
a both revenues and expenses that are determined globally
b both revenues and expenses that are determined locally
c revenues that are determined locally and expenses that are determined globally
d revenues that are determined globally and expenses that are determined locally
e none of the above
10 The globally competitive multinational corporation typically has
a both revenues and expenses that are determined globally
b both revenues and expenses that are determined locally
c revenues that determined locally and expenses that are determined globally
d revenues that determined globally and expenses that are determined locally
e none of the above
11 The is positively exposed to the real value of the domestic currency
a classic exporter
b classic importer
c typical domestic firm
d globally competitive firm
Trang 3e none of the above
12 The is negatively exposed to the real value of the domestic currency
a classic exporter
b classic importer
c typical domestic firm
d globally competitive firm
e none of the above
13 Price elasticity of demand is defined as minus the percentage change in
a interest rates for a given change in money supply
b money supply for a given change in interest rates
c price for a given percentage change in quantity demanded
d quantity demanded for a given percentage change in price
e none of the above
14 Exposure to currency risk
a can be thought of as a regression coefficient
b cannot be measured by conventional methods
c is equal to the price elasticity of demand
d is equal to the variability of currency values
e is equal for all companies
15 Operating exposure to currency risk is most effectively managed by
a hedging with currency forwards or futures
b hedging with currency options
c hedging with real assets
d hedging with virtual assets
e none of the above
16 A disadvantage of real asset hedges is that
a bid-ask spreads can be large
b daily marking to market can cause cash flow mismatches
c option premiums can be large
d they come in only a limited number of currencies and maturities
e they involve substantial sunk costs
17 are relatively insensitive to currency fluctuations
a Domestic firms
b Exporters
c Importers
d Inbred corporations
Trang 4e Multinational corporations
18 Exposure to currency risk is measured as the percentage change in
a currency values given a percentage change in exchange rates
b exchange rates given a percentage change in currency values
c exchange rates given a percentage change in value
d value given a percentage change in exchange rates
e None of the above
19 The domestic currency value of a monetary cash flow denominated in a foreign currency changes with a change in the value of the foreign currency
a disproportionately
b the currency of denomination
c not at all
d one for one
e none of the above
20 The domestic currency value of an expected future operating cash flow denominated in a foreign currency changes with a change in the value of the foreign currency
a disproportionately
b the currency of denomination
c not at all
d one for one
e none of the above
21 Shareholders exposure to currency risk is equal to
a assets less liabilities
b credits less debits
c net monetary assets plus real assets
d the sum of transaction exposure and operating exposure
e none of the above
22 An exporter’s financial market hedging alternatives include each of a) through c) except
a Buy the foreign currency with long-dated forward contracts
b Use currency swaps to acquire financial liabilities in the foreign currency
c Use a rolling hedge to repeatedly sell the foreign currency
d More than one of the above
e None of the above
23 An importer’s financial market hedging alternatives include each of a) through d) except
a Buy the foreign currency with long-dated forward contracts
b Invest in long-dated foreign bonds
Trang 5c Use currency swaps to acquire financial assets in the foreign currency
d Use a rolling hedge to repeatedly sell the foreign currency
e none of the above
24 Managers should assess the performance of financial market hedges of operating exposures
by
a assessing the interaction of operating performance with exchange rate changes
b varying pro forma operating performance within reasonable limits
c varying the exchange rate and assessing the resulting competitive position of the firm
d more than one of the above
e none of the above
25 Operational hedges can create value by
a reducing agency costs
b reducing expected taxes
c reducing costs of financial distress
d more than one of the above
e none of the above
26 The main advantage of a financial market hedge of operating exposure to currency risk is that
a financial market hedges can completely cancel operating exposures to currency risk
b financial market transactions are zero-NPV transactions
c the costs of buying or selling financial instruments are low compared to the costs of investing or disinvesting in real assets
d the uncertain cash flows of operating exposures to currency risk are exactly offset by the uncertain outcomes of a financial market hedge
e none of the above
27 Dimensions of diversification that can reduce variability in the multinational corporation’s operating cash flows include
a currency and geographic diversification
b currency and product market diversification
c geographic and product market diversification
d currency and virtual diversification
e none of the above
28 Multinational corporations have an advantage over domestic firms in their
a market selection and promotion strategies
b plant location decisions
c product sourcing decisions
d more than one of the above
e none of the above
Trang 629 A Dutch exporter with dollar revenues and euro expenses has a foothold in the U.S market The company’s competitors are domestic U.S firms that have revenues and expenses
denominated in dollars Sensible pricing strategies that the Dutch exporter can pursue in response to an appreciation of the dollar include which of a) through c)?
a Maintain the current euro price for their goods, try to sell the same quantity in the U.S market, and capture a bigger contribution margin per unit
b Maintain the current dollar price for their goods and try to increase profits by increasing sales volume at the current contribution margin
c Follow the lead of the price leader in the U.S market
d more than one of the above
e none of the above
30 The percent of the variation in asset value that is explained by variation in a currency value
e all of the above are translation accounting methods
2 The temporal method of FAS #8 identifies each of a) through c) except
a assets and liabilities are translated at historical exchange rates
b depreciation and cost of goods sold are translated at historical exchange rates
c income statement items are translated at an average exchange rate over the period
d all of the above are elements of FAS #8
e none of the above are elements of FAS #8
3 Net exposed assets equal
a assets less liabilities
b exposed assets less exposed liabilities
c shareholders’ equity
d more than one of the above
e none of the above
Trang 74 FAS #52 specifies each of the following rules except
a all assets and liabilities (including common equity) are translated at the current exchange rate
b dividends paid are translated at the current exchange rate
c income statement items are translated at an exchange rate (or an exchange rate average) from the reporting period
d all of the above are elements of FAS #52
e none of the above are elements of FAS #52
5 To maximize shareholder wealth, managers should only hedge translation exposure if it
a affects the total risk of the firm
b involves accounting profits
c involves cash flows
d is convenient
e none of the above
6 FAS #8 assumes that the value of the firm’s real assets are to currency risk FAS #52 assumes that the value of the firm’s real assets are to currency risk
a fully exposed partially exposed
b fully exposed unexposed
c partially exposed fully exposed
d partially exposed unexposed
e unexposed fully exposed
7 Accountants and financial managers prefer FAS #52 to FAS #8 because FAS #52
a allows balance sheet gains or losses to be isolated from reported income
b correctly values current assets and liabilities
c values real assets at historical rates that more reliably reflect asset value
d more than one of the above
e none of the above
8 The relation of stock returns to earnings surprises around the time of corporate earnings announcements is measured with
a a beta coefficient
b an earnings response coefficient
c the price elasticity of demand
d the sensitivity of share price to exchange rates
e none of the above
9 Information-based reasons for hedging translation exposure include each of the following except
Trang 8a The quality of accounting information can be improved
b Meeting profit forecasts retains management’s credibility in the marketplace
c Information costs can be reduced in a perfect market
d Credit ratings are tied to accounting performance rather than cash flow
e Loan covenants are tied to accounting income
10 In the United States, FAS #133 “Accounting for Derivative Instruments and Hedging
Activities” requires each of a) through d) except
a Derivatives are assets and liabilities that should be reported in financial statements
b Market value is the most relevant measure of value
c Only assets and liabilities should be reported as such Income and expenses should be reported on the income statement
d Hedge transactions should be fully capitalized on the balance sheet
e FAS #133 requires all of the above
11 In the United States, FAS #133 “Accounting for Derivative Instruments and Hedging
Activities” values financial derivatives at
a book value
b historical cost
c historical exchange rates
d market
e none of the above
12 Which of the following is a reasonable guideline for currency risk management
a All noncash currency risk exposures should be hedged with currency derivatives
b Do not hedge unless the purpose is to reduce translation exposure to currency risk
c Treasury should hold the managers of individual operating units responsible for the consequences of unexpected changes in currency values
d Treasury should quote market prices for currency hedges to the individual units
e None of the above
13 Adverse selection costs arise from
a differential taxes
b information asymmetries
c large bid-ask spreads
d the perfect market assumptions
e none of the above
14 Bodnar, Hayt, and Marston’s “1998 Wharton Survey of Financial Risk Management by U.S
Non-Financial Firms” in Financial Management found that financial officers’ biggest
concern regarding derivatives was
a accounting treatment
Trang 9b credit risk
c reaction by analysts or investors
d SEC disclosure requirements
e secondary market liquidity
15 According to studies cited in the text, increased disclosure about financial price risks and risk management activities results in each of the following except
a higher trading volumes
b increased risks of litigation over accounting disclosure practices
c increased share price sensitivity to underlying financial prices
d lower trading volume sensitivity to changes in underlying financial prices
e lower bid-ask spreads
CH 13
Multiple Choice
1 According to the text, sources of country risk include
a expropriation risk and default risk
b expropriation risk and other political risks
c financial risk and socioeconomic risk
d political risk and financial risk
e political risk and socioeconomic risk
2 Political risks arise because of
a investment agreements between MNCs and host governments
b the methods used to identify particular political risks
c unexpected events in a country’s financial, economic, or business life
d unexpected changes in the political environment within a host country or in the relationship of a host country to another country
e none of the above
3 Country risk can affect the value of a multinational corporation through
a changes in future cash flows
b changes in investors’ required return on investment
c changes in managers’ actions
d more than one of the above
e none of the above
Trang 104 Companies that rate country risk
a produce country risk ratings that are positively correlated with each other
b produce country risk ratings that are negatively correlated with each other
c produce country risk ratings that are uncorrelated with each other
d seldom provide assessments of micro risks
e use Morgan Stanley Dean Witter’s rating system to produce their ratings
5 Examples of macro country risks include each of the following except
a unexpected changes in a host country’s tax rates
b unexpected changes in a host country’s fiscal policies
c unexpected changes in a host country’s monetary policies
d unexpected changes in a host country’s bankruptcy or ownership laws
e unexpected changes in a host country’s regulations on the use of migrant workers
6 Political risk includes each of the following except
a expropriation
b potential loss of intellectual property rights
c protectionism
d risks arising from dealing with an unfamiliar culture
e the risk of disruptions in operations
7 Political risk is greatest
a in monarchies
b in democracies
c as a result of armed conflict
d when there is a marginal (or fractional) change in government
e when an incumbent political party imposes its agenda on foreign-based MNCs
8 Blocked funds are a drain on project value when
a a project suffers early losses
b they are blocked in the host economy
c they are generated by real assets
d they cannot be immediately repatriated to the parent corporation
e they cannot earn their required return in the host country
9 Intellectual property rights include each of the following except
Trang 1110 Macroeconomic factors that affect country risk assessments include each of the following except
c loan defaults or restructurings
d losses from exchange controls
e payment delays
12 The text describes each of the following strategies for managing country risk except
a disclose material risks in the firm’s financial statements
b negotiate the environment with the host country
c obtain political risk insurance
d plan for disaster recovery
e structure operations to minimize the MNC’s risk exposure and maximize return
13 Insurable political risks possess each of a) through d) except
a A large number of individuals or businesses are exposed to the risk
b The expected loss over the life of the contract is estimable
c The loss is identifiable in time, place, cause, and amount
d The loss is outside the influence of the insured
e Insurable political risks possess more than one of the above
14 Political risk insurance can be obtained on which of a) through c)?
a currency incontrovertibility
b expropriation
c repatriation restrictions
d more than one of the above
e none of the above
15 Much of the 1990’s growth in political risk insurance was due to
a increasing political uncertainty in developed countries
b increasing political uncertainty in developing countries
c the collapse of the Iron Curtain
d the withdrawal of private insurers from the market
e the growth in project finance
Trang 1216 Ways to limit the MNC’s exposure to country risk include which of a) through d)?
a enlist local partners
b limit dependence on a single partner
c limit the scope of the technology transfer
d use more stringent investment criteria
e more than one of the above
17 A can be obtained on processes, products, machines, and new chemical compounds
a copyright
b patent
c trademark
d trade secret
e none of the above
18 A prohibits the unauthorized reproduction of creative works including books, magazines, drawings, paintings, musical compositions, and sound and video recordings
a copyright
b patent
c trademark
d trade secret
e none of the above
19 A is a distinctive name, word, symbol, or device used to distinguish a company’s goods
or services from those of its competitors
a copyright
b patent
c trademark
d trade secret
e none of the above
20 A is a proprietary idea, process, formula, technique, or device that a company uses to its competitive advantage
Trang 131 Expected future cash flows are estimated by only incremental cash flows and all opportunity costs
a including; including
b including; excluding
c excluding; including
d excluding; excluding
e none of the above
2 Nominal cash flows in a foreign currency should be discounted
a at a nominal discount rate in the foreign currency
b at a rate reflecting the parent’s opportunity cost of capital in the domestic currency
c at a weighted average cost of capital
d at the cost of debt
e at the cost of equity
3 Which of the following is false?
a Cash flows in a particular currency should be discounted in that currency
b Cash flows should be discounted at the opportunity cost of capital
c Cash flows to equity should be discounted at the weighted average cost of capital
d Nominal cash flows should be discounted at nominal discount rates
e Real cash flows should be discounted at real discount rates
4 Which of steps a) through d) is inappropriate when discounting foreign currency cash flows using the parent’s perspective?
a Estimate expected future cash flows from the project in the foreign currency and put them on a time line
b Convert expected future cash flows into the domestic currency at the current spot exchange rate
c Identify the appropriate risk-adjusted discount rate in the domestic currency for the project
d Calculate the NPV in the domestic currency
e Each of the above is appropriate
5 If a project has a positive NPV from both the parent’s and the project’s perspective, then the parent firm should
a accept the project
b reject the project
c accept the project and try to capture the value in the foreign currency today
d reject the project and continue to look for positive-NPV projects in the foreign currency
e none of the above
Trang 146 If a project has a positive NPV from the parent’s perspective but a negative NPV from the project’s perspective, then the parent firm should
a accept the project
b reject the project
c accept the project and try to capture the value in the foreign currency today
d reject the project and continue to look for positive-NPV projects in the foreign currency
e none of the above
7 If a project has a negative NPV from the parent’s perspective but a positive NPV from the project’s perspective, then the parent firm should
a accept the project
b reject the project
c accept the project and try to capture the value in the foreign currency today
d reject the project and continue to look for positive-NPV projects in the foreign country
e none of the above
8 If a project has a positive NPV but the NPV is greater from the project’s than from the parent’s perspective, then the parent firm should
a accept the project
b reject the project
c accept the project and hedge the foreign currency cash flows
d reject the project and continue to look for positive-NPV projects in the foreign country
e none of the above
9 A project has a net present value of NPV€ = €10,000 In order to invest in the project, the German government requires that you undertake another project with the following cash flow stream: CF0€ = -€5000, E[CF1€] = €1000, E[CF2€] = €1000, and E[CF3€] = €1000 The appropriate discount rate for this project is i€ = 10% What affect does this tie-in project have on your original NPV€ estimate?
a It increases NPV€ from €10,000 to €12,513.15
b It increases NPV€ from €10,000 to €17,486.85
c It decreases NPV€ from €10,000 to €7,486.85
d It increases NPV€ from €10,000 to €2,513.15
e It is a separate project and has no effect on NPV
10 Suppose the government of Germany offers you a 3-year, non-amortizing €50,000 loan to entice you to undertake a particular project within its borders In addition, the government offers you an attractive rate of i€ = 10% when loans of similar risk yield a return of i€ = 15% The German tax rate is 50% What is the present value of the interest subsidy on this loan?
Trang 15discounting in pounds Assume S0£/€ = £2/€ and i£ = 7%
Trang 16d NPV£ = £53,716.36
e NPV£ = £54,142.84
14 Refer to Exhibit T15.1 Suppose there is a 10% chance that the host government will seize the assets of the project in year 3 If the assets are not seized, you expect to receive the cash flows as shown If the assets are seized, you expect to receive repatriated funds in year 1 and year 2 only Assuming international parity conditions hold, S0£/€ = £2/€, i€ = 5%, and i£ = 7%, what is the NPV in pounds?
16 Refer to Exhibit T15.1 Assume that 50% of the project’s expected cash flows are retained
in host country until the project is 3 years old The opportunity cost of these funds is i€ = 5%, but blocked funds earn no interest What is the net present value of the opportunity cost from these blocked funds?
1 In their famous articles on the cost of capital, corporation finance and the theory of
investment, Modigliani and Miller made each of the following assumptions except
a equal access to bid and ask prices
b homogeneous investor expectations
c homogeneous business risk classes
Trang 17d perpetual cash flows
e rational investors
2 Factors contributing to financial market segmentation include each of the following except
a different investor expectations
b different legal, political, or tax systems
c informational barriers
d rational investors
e transactions costs
3 Foreign political risk includes each of the following except
a unexpected changes in expropriation risk
b unexpected changes in foreign exchange rates
c unexpected changes in local ownership limitations
d unexpected changes in repatriation restrictions
e unexpected changes in taxes
4 Which of a) through d) is true?
a A particular political risk is more likely to be diversifiable by local investors than by international investors
b A political risk such as an election imposes higher costs of capital on MNCs held by globally diversified investors
c From the perspective of managers in the multinational corporation, political risk is not diversifiable
d Global investors are exposed to a multinational corporation’s total risk, measured by standard deviation of return in the investors’ functional currencies
e None of the above
5 A firm’s debt sells for £10 million and equity for £30 million The firm’s before-tax cost
of debt is 9% Its cost of equity is 18% The corporate tax rate is 33% The firm’s
weighted average cost of capital is closest to which of the following?
6 The cost of capital for a project in Spain should
a be a function of the riskiness of the project
b equal the minimum rate of return necessary to induce investors to buy or hold the firm’s stock
c equal the nominal required return for a similar U.S investment
Trang 18d equal the parent’s weighted average cost of capital
e equal the rate used by Spanish investors to capitalize corporate cash flows
7 Which of the following does not fit in a list of potential sources of capital for foreign direct investment?
a funds generated internally by the foreign affiliate
b funds from elsewhere within the corporation
c funds from sources external to the corporation but within the parent country
d funds from sources external to the corporation but within the host country
e each of the above can be a source of funds
8 The firm’s existing WACC is appropriate as a discount rate on a proposed investment when
A the project is financed with debt from the host country
B the project has the same systematic business risk as the rest of the firm
C the project is not exposed to foreign political risk
D the optimal financial structure of the project is identical to that of the firm
Select one of the following:
9 The corporate cost of debt can be approximated by
a regressing stock returns on market returns
b the average historical rate of 8.2 percent on corporate debt
c the coupon rate on existing corporate debt
d the riskfree rate of interest on government bonds
e the yield to maturity on existing corporate debt
10 The yield to maturity on a junk bond investors’ required return
a equals
b overstates
c preempts
d understates
e none of the above
11 Erb, Harvey, and Viskanta [“Political Risk, Financial Risk and Economic Risk,” Financial
Analysts Journal, Nov./Dec 1996] found which of a) through c)?
a An increase in country risk tends to be followed by a rise in equity returns
b Emerging markets with high country risk tend to have less volatile returns than
markets with low country risk
Trang 19c Emerging markets with high country risk tend to have lower betas than
markets with low country risk
d More than one of the above
e None of the above
12 International sources of funding for foreign investment projects include each of a) through d) except
a cash flow from other international divisions
b interest rate and currency swaps
c international debt and equity
d project finance
e all of the above are sources of funding for international investment projects
13 A targeted registered offering must satisfy which of requirements a) through d)?
a Interest or dividends must be paid directly to individuals in foreign countries
b The issuer must certify that it has no knowledge that a U.S taxpayer is the
owner of the security
c The registered owner must be a U.S financial institution
d The securities must be issued in registered form
e More than one of the above
14 Each of a) through d) can be valued as a separate side effect except
a blocked funds
b expropriation risk
c negative-NPV tie-in projects
d subsidized financing
e each of the above can be valued as a side effect
15 Vehicles for repatriating funds from a foreign affiliate to the parent include each of the following except
a Dividend payments on equity
b Higher prices on sales to key suppliers
c Interest payments on debt
d Lease payments on operating and financial lease agreements
e Royalties and management fees
16 Stakeholders prefer internally generated funds to external funds because
a internal funds avoid the discipline of the financial markets
b internal funds avoid the transactions costs of external issues
c they indicate the corporation has free cash flow
d more than one of the above
e none of the above
17 Most countries specify that transfer prices be set at