Fin 4328 (Moore)
Chapter 10 and 11 Problems
Summer 2006
CHAPTER 10
Measuring and Managing Translation and Transaction Exposure
EASY (factual)
10.1 Under FASB 52, foreign exchange gains and losses
a.
flow into a special reserve account
b.
are usually determined according to the current rate method
c.
both a and b
d.
flow directly into the income statement
10.2
Translation exposure reflects the exposure of a company's
a.
foreign operations to currency movements
b.
foreign sales to currency movements
c.
financial statements to currency movements
d.
cash flows to currency movements
10.8
The functional currency of a Colombian manufacturing subsidiary of a US firm selling
exclusively to the U.S.
a.
depends on where it sources its raw materials
b.
depends on where it sells the completed product
c.
will be the Colombian peso
d.
will be the U.S. dollar
The following statement is to be used in answering questions 12 and 13.
Suppose the Swiss subsidiary of a U.S. company owes $1 million. During a recent
period, the Swiss franc appreciated from $0.69 to $0.73, with an average exchange rate
for the period of $0.71.
10.12 The functional currency is U.S. dollar, the net result under FASB-52 would be a
a.
transaction loss of $40,000 for the U.S. parent
b.
transaction gain of $56,383 for the U.S. parent
c.
transaction loss of $32,876 for the Swiss subsidiary
d.
transaction gain of $3176 for the U.S. parent
e.
no transaction gain or loss for either the subsidiary or parent
10.13 The functional currency is Swiss franc, the net result under FASB-52 would be a
a.
transaction loss of $40,000 for the U.S. parent
b.
transaction gain of $56,383 for the U.S. parent
c.
transaction loss of $32,876 for the Swiss subsidiary
d.
transaction gain of $3176 for the U.S. parent
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Fin 4328 (Moore)
Chapter 10 and 11 Problems
Summer 2006
The following information is to be used in answering questions 14-17.
Ajax Manufacturing's German subsidiary has the following balance sheet:
Cash, marketable
securities
Accounts receivable
Inventory (at market.
Fixed Assets
DM 250,000
1,000,000
2,700,000
5,100,000
----------------DM 9,050,000
Current liabilities
Long-term debt
Equity
Total liabilities
plus equity
DM 750,000
3,400,000
4,900,000
--------------DM 9,050,000
Total assets
Suppose the DM appreciates from $0.70 to $0.76 during the period.
10.14 Under the current/noncurrent method, what is Ajax's translation gain (loss).?
a.
a gain of $294,000
b.
a gain of $192,000
c.
a loss of $174,000
d.
a loss of $12,000
10.15 Under the temporal method, what is Ajax's translation gain (loss).?
a.
a gain of $294,000
b.
a gain of $192,000
c.
a loss of $174,000
d.
a loss of $12,000
10.16 Under the current rate method, what is Ajax's translation gain (loss).?
a.
a gain of $294,000
b.
a gain of $192,000
c.
a loss of $174,000
d.
a loss of $12,000
10.21 Hedging cannot provide protection against ________ exchange rate changes.
a.
expected
b.
nominal
c.
real
d.
pegged
10.22 The basic hedging strategy involves
a.
reducing hard currency assets and soft currency liabilities
b.
increasing hard currency liabilities and soft currency assets
c.
reducing soft currency assets and hard currency liabilities
d.
converting soft currencies to hard currencies and lending hard currencies
10.23 Firms that attempt to reduce risk and beat the market simultaneously may end up with
a.
more risk, not less
b.
less risk
c.
a profit as well as reduced risk
d.
a loss as well as reduced risk
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Fin 4328 (Moore)
Chapter 10 and 11 Problems
Summer 2006
10.25 In a forward market hedge, a company that is long a foreign currency will ____ the
foreign currency forward.
a.
buy
b.
sell
c.
borrow
d.
lend
10.26. A ________ involves simultaneously borrowing and lending activities in two different
currencies to lock in the currency’s value of a future foreign currency cash flow.
a.
forward contract
b.
currency collar
c.
money-market hedge
d.
currency option
10.27 A __________ involves offsetting exposures in one currency with exposures in the same
or another currency, where exchange rates are expected to move in such a way that
losses on the first exposed position should be offset by gains on the second currency
exposure and vice versa.
a.
forward contract
b.
currency collar
c.
money-market hedge
d.
currency option
MODERATE
10.28 Which of the following is NOT a basic hedging technique during a depreciation?
a.
buy local currency forward
b.
sell a local currency put option
c.
reduce levels of local currency cash and marketable securities
d.
loosen credit (increase local currency receivables)
10.31 American Airlines hedges a £2.5 million receivable by selling pounds forward. If the
spot rate is £1 = $1.73 and the 90-day forward rate is $1.7158, what is American's cost
of hedging?
a.
$142,000
b.
$35,500
c.
$8,875
d.
it is unknown at the time American enters into its hedge
10.33 Suppose PepsiCo hedges a ¥1 billion dividend it expects to receive from its Japanese
subsidiary in 90 days with a forward contract. The current spot rate is ¥150/$1 and the
90-day forward rate is ¥149/$1. If the spot rate in 90 days is ¥154/$, how much has this
forward market hedge cost PepsiCo?
a.
$173,160
b.
$44,743
c.
Pepsi gains $173,160 from the forward contract
d.
Pepsi gains $217,903 from the forward contract
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Fin 4328 (Moore)
Chapter 10 and 11 Problems
Summer 2006
DIFFICULT
10.34 If you fear the dollar will rise against the Spanish peseta, with a resulting adverse change
in the dollar value of the equity of your Spanish subsidiary, you can hedge by
a.
selling pesetas forward in the amount of net assets
b.
buying pesetas forward in the amount of net assets
c.
reducing the liabilities of the subsidiary
d.
selling pesetas forward in the amount of total assets
10.35 On March 1, Bechtel submits a franc-denominated bid on a project in France. Bechtel
will not learn until June 1 whether it has won the contract. What is the most appropriate
way for Bechtel to manage the exchange risk on this contract?
a.
b.
c.
d.
sell the franc amount of the bid forward for U.S. dollars
buy French francs forward in the amount of the contract
buy a put option on francs in the amount of the franc exposure
sell a call option on francs in the amount of franc exposure
CHAPTER 11 MEASURING AND MANAGING ECONOMIC EXPOSURE
11.2
Economic exposure is based on the extent to which the ______ of the firm will change
when exchange rates change.
a.
value
b.
current assets
c.
long-term liabilities
d.
competitive advantages
11.4
With respect to home currency (HC) appreciation, the key issue for a domestic firm is its
degree of ____.
a.
market share
b.
product differentiation
c.
marketing plan
d.
pricing flexibility
11.5
In the face of exchange rate volatility, developing a pricing strategy must address two key
issues:
a.
market selection and segmentation
b.
market share and selection
c.
market share and profit margin
d.
market share and segmentation
11.7
During periods of exchange rate volatility, firms dealing in _______ products face more
exchange rate risk than the firms selling _________ products.
a.
low demand, high demand
a.
low supply, high supply
c.
undifferentiated, differentiated
d.
differentiated, undifferentiated
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Fin 4328 (Moore)
11.8
Chapter 10 and 11 Problems
Summer 2006
With respect to production management of exchange risk, ________ and plant location
are the principal variables that companies may change to manage the risk.
a.
product innovation
b.
product retirement
c.
market selection
d.
product sourcing
MODERATE (applied)
11.12 A weak dollar will
a.
force American exporters to raise their foreign currency prices
b.
enable American importers to reduce their dollar costs
c.
enable American exporters to improve their profit margins
d.
cost American exporters market share abroad
11.13 A company producing an undifferentiated product and competing with internationally
diversified competitors will face a relatively high___ for its products and possess a
relatively low degree of ________.
a.
price elasticity of demand, pricing flexibility
b.
demand, pricing flexibility
c.
regulatory constraint, efficiency
d.
none of the above
11.14 Which one of the following would NOT be an appropriate response for a U.S. exporter to
appreciation of the dollar?
a.
raise the foreign currency price if the dollar appreciation was expected to be
temporary and the cost of regaining market share was minimal
b.
move some production offshore if the appreciation were expected to persist for an
extended period
c.
keep the foreign currency price constant if demand is quite elastic
d.
hire more local workers and subcontractors
11.16 Which of the following strategies assumes that the MNC has already collected a portfolio
of different facilities world wide?
a.
production shifting
b.
product innovation
c.
product sourcing
d.
raising productivity
11.17 When we examine operating exposure, the key issue for a domestic firm is its
a.
prior import competition
b.
pricing flexibility
c.
asset valuation adjustment
d.
low import content
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Fin 4328 (Moore)
Chapter 10 and 11 Problems
Summer 2006
DIFFICULT (applied)
11.19 A company producing an undifferentiated product and competing with internationally
diversified competitors will face a relatively __ price elasticity of demand for its products
and possess a relatively ___ degree of pricing flexibility.
a.
high, low
b.
low, low
c.
low, high
d.
high, high
11.20 The appropriate response for a U.S. exporter to appreciation of the dollar would be to
a.
raise the foreign currency price if the dollar appreciation was expected to be
temporary and the cost of regaining market share was minimal
b.
move some production offshore if the appreciation were expected to persist for an
extended period
c.
keep the foreign currency price constant if demand is quite elastic
d.
all of the above
11.21 Suppose McDonald's charges Ptas. 25 for a burger in Madrid. Its costs are Ptas. 18 per
burger and these costs are not expected to change with the exchange rate. If the peseta
devalues from $0.107 to $0.096, what price will McDonald's have to charge for its
burgers to maintain its dollar profit margin?
a.
Ptas. 25.80
b.
Ptas. 27.86
c.
Ptas. 22.43
d.
Ptas. 24
11.22 Suppose Apple is selling Macintosh computers in Germany for DM 5,500 when the
exchange rate is DM 1 = $0.68. If the DM rises to $0.71, what price must Apple charge to
maintain its dollar unit revenue?
a.
DM 5,147
b.
DM 6,361
c.
DM 5,743
d.
DM 5,268
11.24 In the face of an appreciating yen, Toyota should consider
a.
investing in U.S. production facilities
b.
raising its research and development investment
c.
coming out with new cars targeted at the low end of the market
d.
a and b only
11.25 A U.S. exporter that anticipates an appreciation of the dollar should
a.
sell foreign currencies forward
b.
borrow foreign currencies
c.
scout out possible foreign production sites
d.
consider raising dollar prices on exports
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Fin 4328 (Moore)
Chapter 10 and 11 Problems
Summer 2006
11.28 Shorter product cycles can improve currency risk management by allowing the firm to
a.
incorporate more up-to-date technology in its products
b.
respond more quickly to changing market conditions
c.
reduce the average price elasticity of demand
d.
all of the above
11.29 Nissan, the Japanese car manufacturer, exports a substantial fraction of its output to the
United States. What financial measures would be suitable for Nissan to take to reduce its
currency risk?
a.
borrow only yen to finance its operations
b.
borrow dollars to finance part of its operations
c.
sell yen forward in the amount of its annual shipments to the U.S.
d.
buy yen forward in the amount of its annual shipments to the U.S.
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