Chapter 6: Foreign Currency Risk Management and Chapter 7: Financing

International Trade

Multiple Choice
Identify the choice that best completes the statement or answers the question.

1) ________ exposure deals with cash flows that result from existing contractual obligations.
A) Operating
B) Transaction
C) Translation
D) Economic
Answer: B

2) ________ exposure measures the change in the present value of the firm resulting from
unexpected changes in exchange rates.
A) Operating
B) Transaction
C) Translation
D) Accounting
Answer: A

3) Each of the following is another name for operating exposure EXCEPT

A) economic exposure.
B) strategic exposure.
C) accounting exposure.
D) competitive exposure.
Answer: C

4) Transaction exposure and operating exposure exist because of unexpected changes in future
cash flows. The difference between the two is that ________ exposure deals with cash flows
already contracted for, while ________ exposure deals with future cash flows that might change
because of changes in exchange rates.
A) transaction; operating
B) operating; transaction
C) operating; accounting
D) none of the above
Answer: A
5) ________ exposure is the potential for accounting-derived changes in owner's equity to occur
because of the need to translate foreign currency financial statements into a single reporting
currency.
A) Transaction
B) Operating
C) Economic
D) Accounting
Answer: D

6) Losses from ________ exposure generally reduce taxable income in the year they are realized.
________ exposure losses may reduce taxes over a series of years.
A) accounting; Operating
B) operating; Transaction
C) transaction; Operating
D) transaction; Accounting
Answer: C

7) Losses from ________ exposure generally reduce taxable income in the year they are realized.
________ exposure losses are not cash losses and therefore, are not tax deductible.
A) transaction; Operating
B) accounting; Operating
C) accounting; Transaction
D) transaction; Translation
Answer: D

8) ________ exposure may result from a firm having a payable in a foreign currency.
A) Transaction
B) Accounting
C) Operating
D) None of the above
Answer: A

9) Translation exposure may also be called ________ exposure.

A) transaction
B) operating
C) accounting
D) currency
Answer: C
10) Functional currency is
A) the currency of the primary economic environment in which the subsidiary operates and
generates cash flows.
B) the currency of the country where the corporation is incorporated.
C) the weighted average of the currencies of all foreign subsidiaries.
D) the currency proscribed by the national laws of the subsidiary's country of incorporation.
Answer: A

11) ________ exposure is the potential for an increase or decrease in the parent company's net
worth and reported net income caused by a change in exchange rates since the last transaction.
A) Transaction
B) Operating
C) Currency
D) Translation
Answer: D

12) The two basic methods for the translation of foreign subsidiary financial statements are the
________ method and the ________ method.
A) current rate; temporal
B) temporal; proper timing
C) current rate; future rate
D) none of the above
Answer: A

13) Historical exchange rates may be used for ________, while current exchange rates may be
used for ________.
A) fixed asses and current assets; income and expense items
B) equity accounts and fixed assets; current assets and liabilities
C) current assets and liabilities; equity accounts and fixed assets
D) equity accounts and current liabilities; current assets and fixed assets
Answer: B

14) Another name for operating exposure is ________ exposure.

A) economic
B) competitive
C) strategic
D) all of the above
Answer: A
15) What type of international risk exposure measures the change in present value of a firm
resulting from changes in future operating cash flows caused by any unexpected change in
exchange rates?
A) transaction exposure
B) accounting exposure
C) operating exposure
D) translation exposure
Answer: C

16) Which of the following is NOT an example of an operating cash flow?

A) management fees and distributed overhead
B) royalties and license fees
C) rent and lease payments
D) dividend paid to parent company
Answer: D

17) The three main types of foreign exchange risk are

A) operating, transaction, and translation.
B) translation, accounting, and operating.
C) transaction, accounting, and translation.
D) operating, currency, and market.
Answer: A

18) Diversification as a strategic tool to manage operating exposure includes

A) internationalization of suppliers' base.
B) opening new markets with localized production.
C) diversifying finance base across various capital markets and currencies.
D) All of the above
Answer: D

19) The primary method by which a firm may protect itself against operating exposure impacts is
A) money market hedges.
B) diversification.
C) forward contract hedges.
D) balance sheet hedging.
Answer: B
20) An advantage of international diversification is the
A) reduction in the variability of future cash flows due to domestic business cycles.
B) increase in the availability of capital.
C) diversification of political risk.
D) all of the above.
Answer: D

21) The risk of default on the part of the importer is present as soon as
A) a price quote is requested.
B) goods are shipped.
C) the export contract is signed.
D) goods are received.
Answer: B

22) A fundamental problem of international trade is

A) authorities in the importing country may disallow the consular invoice.
B) authorities in the exporting country may refuse to issue a consular invoice.
C) buyer and seller may act in collusion.
D) buyer and seller may not completely trust each other.
Answer: D

23) A signed ________ is issued by the exporter and contains a precise description of the
merchandise.
A) packing list
B) bill of lading
C) commercial invoice
D) banker's acceptance
Answer: C

24) The main disadvantage of the Letter of Credit (L/C) is

A) L/C reduces counterparty and foreign exchange risk.
B) L/C can serve as collateral for pre-export financing vehicle.
C) L/C can entail significant bank fees and reduce borrowing line of credit.
D) All of the above
Answer: C
25) ________ is the risk that interest rates will change between signing the contract and payment
for goods and services.
A) Currency risk
B) Risk of non-completion
C) Default risk
D) Portfolio risk
Answer: A

26) Which of the following is NOT true regarding a letter of credit?

A) The importer and exporter agree on a transaction.
B) The importer applies to its local bank for the issuance of a letter of credit.
C) The exporter applies to its local bank for the issuance of a letter of credit.
D) The importer's bank cuts a sales contract based on its assessment of the creditworthiness of
the importer.
Answer: C

27) The letter of credit is designed to

A) allow the buyer to obtain title to the goods before they are received.
B) free the seller from concerns over the payment abilities of the buyer.
C) free the seller from any merchandise guarantees.
D) be issued by the bank at the request of an exporter.
Answer: B

28) A ________ is issued to the exporter by a common carrier transporting the merchandise.
A) commercial invoice
B) banker's acceptance
C) packing list
D) bill of lading
Answer: D

29) A banker's acceptance is a ________ that has been accepted by a bank.

A) credit certificate
B) time draft
C) line of credit
D) bill of lading
Answer: B
30) The draft is the instrument normally used in international commerce to
A) transfer product.
B) prove ownership.
C) transfer title.
D) initiate the sale.
Answer: C