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54 Cards in this Set

  • Front
  • Back
Anothername for operating exposure is ________ exposure.

all of the above

net operating exposure

is the net result of all cash outflows and inflows by currency

Whattype of international risk exposure measures the change in present value of afirm resulting from changes in future operating cash flows caused by anyunexpected change in exchange rates?

operating exposure

The goal of operating exposure analysis is toidentify strategic operating techniques the firm might adopt to enhance valuein the face of unanticipated exchange rate changes.


________cash flows arise from intracompany and intercompany receivables and paymentswhile ________ cash flows are payments for the use of loans and equity.

operating, financing

Operating cash flows may occur in differentcurrencies and at different times, but financing cash flows may occur only in asingle currency.


Whichof the following is NOT an example of a financial cash flow?

payment for goods and services

Whichof the following is NOT an example of an operating cash flow?

dividend paid to parent company

________exposure is far more important for the long-run health of a business thanchanges caused by ________ or ________ exposure.

operating, translation, transaction

Expected changes in foreign exchange ratesshould already be factored into anticipated operating results by management andinvestors.


Underconditions of equilibrium, management would use ________ exchange rate as anunbiased predictor of future spot rates when preparing operating budgets.

the forward rate

Simpson Sign Company based in Frostbite Falls,Minnesota has a 6-month C$100,000 contract to complete sign work in Winnipeg,Manitoba, Canada. The current spot rateis $1.02/C$ and the forward rate is $1.01/C$. Under conditions of equilibrium,management would use today ________ when preparing operating budgets.A) $102,000


the three main types of foreign exchange risk are

operating, transaction, and translation

Operatingexposure referred to as MEDIUM RUN: EQUILIBRIUM has which of the following setof characteristics?

it lasts two to five years, has complete pass-through of exchange rate changes, and existing competitors begin partial responses

operating exposure

is the possibility that future cash flows will change due to an unexpected change in foreign exchange rates

An unexpected change in exchange rates impacts afirm's cash flows at what level(s)?

all of the above

Diversificationas a strategic tool to manage operating exposure includes

all of the above

Whichof the following is NOT an operating cash flow?

interest payment by a subsidiary to a parent company

Whichof the following is NOT an example of diversifying operations?

raising funds in more than one country

Whichof the following is NOT an example of diversification in financing?

diversifying sales

Managementmust be able to predict disequilibria in international markets to takeadvantage of diversification strategies.


When disequilibria in international marketsoccur, management can take advantage by

all of the above

Purelydomestic firms will be at a disadvantage to MNEs in the event of market disequilibriabecause

domestic firms lack comparative data from its own sources

Which of the following is NOT an advantage offoreign exchange risk management?

all of the above are potential advantages of foreign exchange risk management

Theprimary method by which a firm may protect itself against operating exposureimpacts is


Anadvantage of international diversification is the

all of the above

Diversifyingsources of financing, regardless of the currency of denomination, can lower afirm's cost of capital and increase its availability of capital.


Whichof the following is NOT identified by your authors as a proactive managementtechnique to reduce exposure to foreign exchange risk?

remaining a purely domestic firm

Whichone of the following management techniques is likely to best offset the risk oflong-run exposure to receivables denominated in a particular foreign currency?

borrow money in the foreign currency in question

Cash flow matching can be effective hedgingtechnique when

the exposure cash flow is relatively constant and predictable over time

which one of the following management techniques is likely to best offset therisk of long-run exposure to payables denominated in a particular foreigncurrency

lend money in the foreign currency in question

Theparticular strategy of trying to offset inflows of cash from one country withoutflows of cash in the same currency is known as


Whichof the following is NOT an acceptable hedging technique to reduce risk causedby a relatively predictable long-term foreign currency inflow of Japanese yen?

import raw materials from japan denominated in dollars

AnMNE has a contract for a relatively predictable long-term inflow of Japaneseyen that the firm chooses to hedge by seeking out potential suppliers in Japan.This hedging strategy is referred to as

a natural hedge

AnMNE has a contract for a relatively predictable long-term inflow of Japaneseyen that the firm chooses to hedge by paying for imports from Canada inJapanese yen. This hedging strategy is known as

currency switching

AU.S. timber products firm has a long-term contract to import unprocessed logsfrom Canada. To avoid occasional and unpredictable changes in the exchange ratebetween the U.S. dollar and the Canadian dollar, the firms agree to split betweenthe two firms the impact of any exchange rate movement. This type of agreementis referred to as

risk sharing

Risksharing agreements were especially popular during the Bratton Woods Agreement,but lately have lost its significance in the long-term customer-supplierrelationship.


A________ occurs when two business firms in separate countries arrange to borroweach other's currency for a specified period of time.

back to back loan

A Canadian firm with a U.S. subsidiary and aU.S. firm with a Canadian subsidiary agree to a parallel loan agreement. Insuch an agreement, the Canadian firm is making a/an ________ loan to the________ subsidiary while effectively financing the ________ subsidiary.

direct, us, Canadian

Oneof the main risks eliminated with Cross-Currency Swaps once compared toback-to-back loans is

counter party risk because the intermediary serves as a guarantor

Whichof the following is NOT an important impediment to widespread use of parallelloans

the process does not avoid exchange rate risk

A ________ resembles a back-to-back loan exceptthat it does not appear on a firm's balance sheet.

currency swap

A ________ is the term used to describe aforeign currency agreement between two parties to exchange a given amount ofone currency for another, and after a period of time, to give back the originalamounts.

currency swap

Currency swaps are exclusively for periods of time under one year.


ABritish firm and a U.S. Corporation each wish to enter into a currency swaphedging agreement. The British firm is receiving U.S. dollars from sales in theU.S. but wants pounds. The U.S. firm is receiving pounds from sales in Britainbut wants dollars. Which of the following choices would best satisfy thedesires of the firms?
TheBritish firm pays dollars to a swap dealer and receives pounds from the dealer.The U.S. firm pays pounds to the swap dealer and receives dollars.
Mostswap dealers arrange swaps so that each firm that is a party to the transactiondoes not know who the counterparty is.


Mostswap dealers arrange swaps so that each firm that is a party to the transactionknows who the counterparty is.


)Swap agreements are treated as off-balance sheet transactions via U.S.accounting methods.


Swapagreements are treated as line items on the balance sheet via U.S. accountingmethods.


Afterbeing introduced in the 1980s, currency swaps have remained a relativelyinsignificant financial derivative instrument.


Afterbeing introduced in the 1980s, currency swaps have gained increasing importanceas financial derivative instruments.


Whichof the following is NOT one of the commonly employed financial policies used tomanage operating and transaction exposure?

all of the above are commonly used financial policies for managing operating exposure

Contractualapproaches (i.e., options and forwards) have occasionally been used to hedgeoperating exposure, but are costly and possibly ineffectual.


Which of the following is NOT a proactive policyfor managing operating exposure?

all of the above are proactive management policies for operating exposure