Translation exposure reflects
the exposure of a firm's financial statements to exchange rate fluctuations
transaction exposure reflects
the exposure of a firm's international contractual transactions to exchange rate fluctuations
Generally, MNCs with foreign revenues will be ______ affected by a _______foreign currency
Diz Co. is a US based MNC with net cash inflows of euros and net cash inflows of Swiss Francs, These two currrencies are highly correlated in their movements against the dollar. Yanta Co. is a US 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?
What reflects a hedge of net receivables in British pounds by a US firm?
purchase a currency put option in British pounds and
sell pounds forward
If Lazer Co. desired to lock in the maximum it would have to pay for its net payables in euros but wanted to be able to capitalize if the euro depreciates substantially against teh dollar by the time payment is to be made, the most appropriate hedge would be:
Purchasing euro call option
assume that Cooper Co. will not use its cash balances in a money market hedge. when deciding between a forward hedge and a money market hedge, it ______ determine which hedge is preferable before implementing the hedge. It _______ determine whether either hedge will outperform an unhedged strategy before implementing the hedge.
If a US firm's expenses are more susceptible to exchange rate movements than revenue, the firm will _____ if the dollar _____
assume that a Japanese car manufacturer exports cars to US dealerships, which are priced in yen. The demand for those cars declines when the yen is strong. the manufacturer also produces some cars in the US with US materials and those cars are priced in dollars. The manufacturer could reduce its economic exposure by:
producing more automobiles in the US
Vermont Co. has foreign expenses denominated in euros. Appreciation of the euro relative to the US dollar will cause this firm's reported earnings (from the consolidated income statement) to ______. If a firm desired to protect against this possibility, it could stabilize its reported earnings by _____ euros forward in the foreign exchange market.
Tennessee Co. conducts business in the US and Canada. The net cash flows from Canadian operations are expected to be C$500,000 next year. the canadian dollar is valued at about $.90. The net cash flows from US operations are supposed to be $200,000. To reduce sensitivity of its net cash flows without reducing its volume of business in Canada, Tennessee Co. could:
purchase canadian supplies
to exploit monopolistic advantages, an MNC should:
establish subsidiaries in markets where competitors are unable to produce the identical product
When a firm analyzes the feasibility of a project, it should consider the:
variablitlity of the project's cash flows and the correlation of the project's cash flows relative to the prevailing cash flows of the MNC
When a firm perceives that a foreign currency is _____, the firm may attempt direct foreign investment in that country, as the initial outlay should be relatively ______.
To fully benefit from the use of foreign raw materials:
establish a subsidiary in a market where raw materials are cheap and accessible and sell the finished product to countries where the raw materials are more expensive
If a subsidiary project is assessed from the subsidiary's perspective, then an expected appreciation in the foreign currency will affect the feasibility of the project_______
not at all
What factors should be considered in multinational capital budgeting?
exchange rate fluctuation
When quantifying country risk:
weights should be assigned to the political and financial factors according to their perceived importance
When determining whether a particular proposed project in a foreign country is feasible:
country risk analysis should be incorporated within the capital budgeting analysis
What forecasting technique would best represent the sole use of the pattern of historical currency values of the euro to predict the euro's future currency value?
if the forward rate was expected to be an unbiased estimate of the future spot rate, and interest rate parity holds, then:
the international fisher effect is supported
When the dollar strengthens, the reported consolidation earnings of US based MNCs are ______ affected by translation exposure. When the dollar weakens, the reported consolidated earnings are _____affected.
unfavorably; favorably affected
if an MNC expects cash inflows of equal amounts in two currencies, and the two currencies are ______ correlated, the MNCs transaction exposure is relatively_______.
With regard to hedging translation exposure, translation losses______, and gains on forward contracts used to hedge translation exposure.
are not tax deductible; are taxed
As opposed to transaction exposure, managing economic exposure involves developing a ______ solution.
Which of the following is a reason to consider international business?
economies of scale
exploit monopolistic advantages
Assume a US firm initiates direct foreign investment in the UK. If the British pound is expected to appreciate against the dollar, the dollar value of earnings remitted to the parent should________. the parent may request that the subsidiary ______ in order to benefit from the expectation about the pound.
increase; postpone remitting earnings until the pound strengthens
What are some disadvantages of direct foreign investment?
the expense of establishing a foreign subsidiary
the uncertainty of inflation and exchange rate movements
when economic conditions of two countries are _____, then a firm would _____ its risk by operating in both countries instead of concentrating in just one.
not highly correlated; reduce
(T or F) Once a decision to establish a foreign subsidiary has been made, it is irreversible. Therefore, no periodic monitoring of the project is necessary.
Other things being equal, a blocked funds restriction is more likely to have a significant adverse effect on a project if the currency of that country is expected to ______ over time, and if the interest rate in that country is relatively ________.
(T or F) The greater the uncertainty about a project's forecasted cash flows, the larger should be the discount rate applied to cash flows, other things being equal.
(T or F) The objective of sensitivity analysis in capital budgeting is to determine how sensitive the NPV is to alternate values of the input variables.
What are some techniques for assessing country risk?