Quiz

Question 1

If the European subsidiary of a Canadian firm has net exposed assets of E500,000, and the euro drops in value from $1.40/euro to $1.30/euro, then the Canadian firm experiences a translation loss of $50,000. True/False

Answer 1

True

Question 2

The degree of “segmentation” of a national security market refers to the extent to which the required rate of return on securities on that market differs from that on comparable securities in other national markets.T/F

Answer 2

True

Question 3

Under the Current Rate method of translation of a foreign subsidiary, accounting exposure is calculated as Total Assets less Total Liabilities, and equals the Equity of the subsidiary. T/F

Answer 3

True

Question 4

An international security adds value to a portfolio if it reduces risk without reducing return. T/F

Answer 4

True

Question 5

MNE’s may have a higher marginal cost of capital or “MCC” than purely domestic firms because they have greater risks and costs that offset their greater return potential. T/F

Answer 5

True

Question 6

When hedging a transaction exposure using futures or option contracts, the hedger achieves a gain/loss on the contract that will offset any losses/gains on the settlement of the transaction in the spot market, where the currency is actually bought or sold.

Answer 6

True

Question 7

Balance Sheet hedging involves suboptimal investment or financing decisions in order to influence the reported book value of the firm, reported earnings, or both.

Answer 7

True

Question 8

A Canadian forest products firm has a wholly owned foreign subsidiary located in Japan. The subsidiary retails tropical hardwood furniture in Asia that it buys from many different sources. For financial reporting purposes, this subsidiary is likely to be classified as self-sustaining and to have its financial statements translated using the temporal method.

Answer 8

False

Question 9

Transaction exposure that arises between the time a firm takes an order and when it actually completes the transaction is known as:
A) Billing Exposure
B) Quotation Exposure
C) Backing Exposure
D) Order Exposure

Answer 9

C)

Question 10

All other things equal, an increase in the firm’s tax rate will increase the weighted average cost of capital or “WACC” if the firm has both debt and equity financing.

Answer 10

False

Question 11

Gains or losses caused by translation that arises when using the Temporal method are held in an equity reserve account and are NOT reported as part of currrent period earnings.

Answer 11

False

Question 12

Operating cash flows arise from intracompany and intercompany receivables and payments while Financing cash flows are payments for the use of loans and equity.

Answer 12

True

Question 13

A management technique that is useful to offset the risk of long-run exposure to payables denominated in a particular foreign currency is to borrow money in the foreign currency in question.

Answer 13

False

Question 14

Empirical studies indicate that multinational enterprises or “MNEs” have a lower debt/capital ratio than similar domestic firms, so that MNEs have a lower cost of capital

Answer 14

False.

Question 15

A “Tunnel Forward” allows for an upper and a lower limit on the outcome of a Foreign Currency denominated transaction for a hedging firm, but for some range of exchange rates the outcome remains entirely flexible and is based on the actual spot exchange rate.

Answer 15

True

Question 16

“Foreign Exchange Facility Gurantees” are designed to support Canadian exporters who are arranging forward contracts to hedge their export sales. The gurantees save these firms from having to provide collateral for the forward contracts, which would tie up a portion of their working capital.

Answer 16

True

Question 17

If you have a foreign currency receivable to hedge, you would buy FC futures and later resell them to close the position.

Answer 17

False

Question 18

Foreign Currency debt serves as a natural hedge against unexpected exchange rate changes for a stream of Foreign Currency revenues, since unexpected increases (decreases) in the value of the revenue stream will be offset by unexpected increases (decreases) in the cost of servicing the debt.

Answer 18

True

Question 19

A synthetic forward contract for the hedge of a foreign currency or “FC” receivable involves buying a call and selling a put on the FC

Answer 19

False

Question 20

A company requiring financing for a 5 year period takes a 1 year loan with a fixed rate of interest. This company is subject to credit risk but not to repricing risk.

Answer 20

False

Question 21

Operating exposure to unexpected exchange rate changes is larger if the unexpected exchange rate change is perceived to be more permanent, and if the firm is less able to adapt to the change by altering its selling prices and its business activities.

Answer 21

True

Question 22

All else equal, the premium on a Put option on a foreign currency will be higher if the foreign interest rate is higher.

Answer 22

True

Question 23

With a “Participating forward” for a FC receivable, the firm will buy a Put on the FC for the full coverage of the transaction but will sell a call on the FC for only a portion of the exposed amount.

Answer 23

True