Objective type questions on foreign exchange assets

1. Transaction exposure reflects:

A. the exposure of a firm ongoing international transactions to exchange rate fluctuations.

B. the exposure of a firm local currency value to transactions between foreign exchange traders.

C. the exposure of a firm financial statements to exchange rate fluctuations.

D. the exposure of a firm cash flows to exchange rate fluctuations.

2. 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; favourably affected

C. weak; adversely affected

D. none of these

3. Your Company will receive C$600,000 in 90 days. The 90-day forward rate in the Canadian dollar is $.80. If you use a forward hedge, you will:

A. Receive $750,000 today.

B. Receive $750,000 in 90 days.

C. Receive $480,000 today.

D. Receive $480,000 in 90 days.

4. White-water Co. is a U.S. company with sales to Canada amounting to C$8 million. Its cost of materials attributable to the purchase of Canadian goods is C$6 million. Its interest expense on Canadian loans is C$4 million. Given these exact figures above, the dollar value of White-water's "earnings before interest and taxes" would _______ if the Canadian dollar appreciates; the dollar value of White-water's cash flows would _______ if the Canadian dollar appreciates.

A. increase; increase

B. decrease; increase

C. decrease; decrease

D. increase; decrease

5. An MNC expects to sell fixed assets it utilizes in Europe in the distant future. In order to hedge the sale of these assets in the distant future, the MNC could create a (n) _______ that _______ the expected value of the assets in the future.

A. asset; matches

B. asset; exceeds

C. liability; matches

D. liability; is less than

6. Which of the following is not an advantage resulting from the Asian crisis that would favour direct foreign investment in Asia?

A. strong local demand for products.

B. low production costs.

C. weak local currencies.

D. all of these are advantages.

7. When a foreign subsidiary is not wholly owned by the parent and a foreign project is partially financed with retained earnings of the parent and of the subsidiary, then-

A. the parent\'s perspective should be used to evaluate a foreign project.

B. the subsidiary\'s perspective should be used to evaluate a foreign project.

C. the foreign project should enhance the value of both the parent and the subsidiary.

D. none of these.

8. If countries are highly influential upon each other, the correlations of their economic growth levels would likely be _______. A firm would benefit _______ by diversifying sales among these countries relative to another set of countries that were not influential upon each other.

A. high and positive; more

B. close to zero; more

C. high and positive; less

D. close to zero; less

9. Other things being equal, firms from a particular home country will engage in more international acquisitions if they expect foreign currencies to _______ against their home currency, and if their cost of capital is relatively _______.

A. appreciate; low

B. appreciate; high

C. depreciate; high

D. depreciate; low

10. Assume the parent of a U.S.-based MNC plans to completely finance the establishment of its British subsidiary with existing funds from retained earnings in U.S. operations. According to the text, the discount rate used in the capital budgeting analysis on this project should be most affected by-

A. the cost of borrowing funds in the U.K.

B. the cost of borrowing funds in the U.S.

C. the parent\'s cost of capital.

D. the cost of borrowing funds in both the U.K. and the U.S