1. Which of the following is true?
An exporter can shift exchange rate risk to their customers by invoicing in their customer's local currency.
A 3-year swap contract can be viewed as a portfolio of 3 forward contracts with maturities of 1, 2, and 3 years. One important exception is that the forward price is the same for the swap contract but not for the forward contracts.
Contingent exposure, which refers to a situation in which the firm may or may not be subject to exchange exposure, can best be hedged with money market hedging.
An MNC seeking to reduce transaction exposure with a strategy of leading and lagging can probably employ the strategy more effectively with customers or outside suppliers than with intra firm payables and receivables.
2. When exchange rates change,
this can alter the operating cash flow of a domestic firm.
this can alter the competitive position of a domestic firm.
this can alter the home currency values of a multinational firm's assets and liabilities.
All of the above.
3. Which of the following is not true?
Translation exposure is not currency specific; rather, it is entity specific.
In managing translation exposure, the balance sheet hedge is to eliminate the mismatch between net assets and net liabilities denominated in the same currency.
The actual translation process prescribed by FASB 52 is a two-stage process.
Using a derivatives hedge to control translation exposure involves speculation about foreign exchange rate changes, and exposes a firm with transaction exposure, however.
4. Which of the following is true?
The PPP (purchasing power parity) suggests that the inflation rate differential reflects the expected change in the exchange rate.
The FEP (forward expectation parity) suggests that the nominal interest rate differential reflects the expected change in the exchange rate.
The IRP (interest rate parity) suggests that the nominal interest rate differential reflects the expected change in the exchange rate.
The IFE (international fisher effect) states that any forward premium or discount is equal to the change in the exchange rate.
None of the above.