Chapter 10—Measuring Exposure to Exchange Rate Fluctuations

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. According to the text, currency variability levels ____ perfectly stable over time, and currency
correlations ____ perfectly stable over time.
a. are; are not
b. are; are
c. are not; are not
d. are not; are

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 ANS: C PTS: 1
6. Which of the following operations benefit(s) from depreciation of the firm's local currency?
a. borrowing in a foreign country and converting the funds to the local currency prior to the
depreciation.
b. purchasing foreign supplies.
c. investing in foreign bank accounts denominated in foreign currencies prior to depreciation
of the local currency.
d. A and B
ANS: C PTS: 1

7. Under FASB 52:

a. translation gains and losses are included in the reported net income.
b. translation gains and losses are included in stockholder's equity.
c. A and B
d. none of the above
ANS: B PTS: 1

8. 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

9. 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

10. 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.
b. transaction exposure.
c. translation exposure.
d. economic and transaction exposure.
ANS: A PTS: 1

11. Yomance Co. is a U.S. company that has exposure to Japanese yen and British pounds. It has net
inflows of 5,000,000 yen and net outflows of 60,000 pounds. The present exchange rate of the
Japanese yen is $.012 while the present exchange rate of the British pound is $1.50. Yomance
Co. has not hedged its positions. The yen and pound movements against the dollar are highly
and positively correlated. If the dollar strengthens, then Yomance Co. will:

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 a. benefit, because the dollar value of its pound position exceeds the dollar value of its yen
position.
b. benefit, because the dollar value of its yen position exceeds the dollar value of its pound
position.
c. be adversely affected, because the dollar value of its pound position exceeds the dollar
value of its yen position.
d. be adversely affected, because the dollar value of its yen position exceeds the dollar value
of its pound position.
ANS: A PTS: 1

12. 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

13. 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. −$4,303
b. −$7,830
c. −$5,873
d. −$1,958
ANS: C
SOLUTION: Net exposure = €200,000 − €50,000 = €150,000
Maximum one-month loss: 2% − (1.96 × 2.5%) = −2.9%
€150,000 × $1.35 × (−0.029) = −$5,873