Accounts-AW519

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1. The variability of the dollar value of an asset (invested overseas) depends on
 
A. the variability of the dollar value of the asset that is related to random changes in the exchange rate.
B. the dollar value variability that is independent of exchange rate movements.
C. both a) and b)
D. none of the above
 
2. Your U.S. firm has a £100,000 payable with a 3-month maturity. Which of the following will hedge your liability?
 
A. Buy a call option on £100,000 with a strike price in euro.
B. Buy a put option on £100,000 with a strike price in dollars.
C. Buy a call option on £100,000 with a strike price in dollars.
D. None of the above
 
3. To hedge a foreign currency receivable
 
A. buy call options on the foreign currency with a strike in the domestic currency.
B. sell put options on the foreign currency with a strike in the domestic currency.
C. sell call options on the foreign currency with a strike in the domestic currency.
D. buy put options on the foreign currency with a strike in the domestic currency.
 
4. Examples of control risk include
 
A. the unexpected imposition of capital controls, inbound or outbound, and withholding taxes on dividend and interest payments.
B. unexpected changes in environmental policies, sourcing/local content requirements, minimum wage law, and restriction on access to local credit facilities.
C. restrictions imposed on the maximum ownership share by foreigners, mandatory transfer of ownership to local firms over a certain period of time (fade-out requirements), and the nationalization of local operations of MNCs.
D. none of the above
 
5. Examples of transfer risk include
 
A. the unexpected imposition of capital controls, inbound or outbound, and withholding taxes on dividend and interest payments.
B. unexpected changes in environmental policies, sourcing/local content requirements, minimum wage law, and restriction on access to local credit facilities.
C. restrictions imposed on the maximum ownership share by foreigners, mandatory transfer of ownership to local firms over a certain period of time (fade-out requirements), and the nationalization of local operations of MNCs.
D. none of the above
 
6. The extent to which the value of the firm would be affected by unexpected changes in the exchange rate is
 
A. transaction exposure.
B. translation exposure.
C. economic exposure.
D. none of the above
 
7. MNCs may undertake overseas investment projects in a foreign country, despite the fact that local firms may enjoy inherent advantages. This implies that
 
A. MNCs are making a mistake in this case and will have to eventually withdraw.
B. MNCs should have significant advantages over local firms such as comparative advantages due to intangible assets.
C. the local firms will not have to compete due to their inherent advantages over the foreigners.
D. none of the above
 
8. Systematic risk refers to
 
A. economic and political risk.
B. the risk that can be hedged.
C. the diversifiable (company specific) risk of an asset.
D. the nondiversifiable (market) risk of an asset.
 
9. Economic exposure refers to
 
A. the sensitivity of realized domestic currency values of the firm’s contractual cash flows denominated in foreign currencies to unexpected exchange rate changes.
B. the extent to which the value of the firm would be affected by unanticipated changes in exchange rate.
C. the potential that the firm’s consolidated financial statement can be affected by changes in exchange rates.
D. ex post and ex ante currency exposures.
 
10. When evaluating a foreign investment project, it is important for the MNC to consider the effect of political risk, as a sovereign country can change “the rules of the game”. To account for this
 
A. the MNC may adjust the cost of capital upward.
B. the MNC may lower the expected cash flows from the foreign project.
C. the MNC may purchase insurance policies against the hazard of political risks.
D. all of the above
 
11. The adjusted present value (APV) model that is suitable for an MNC is the basic net present value (NPV) model expanded to
 
A. distinguish between the market value of a levered firm and the market value of an unlevered firm.
B. discern the blocking of certain cash flows by the host country from being legally remitted to the parent.
C. consider foreign currency fluctuations or extra taxes imposed by the host country on foreign exchange remittances.
D. all of the above
 
12. In evaluating the pros and cons of corporate risk management, “market imperfections” refer to
 
A. economic costs, noneconomic costs, arbitrage costs, and hedging costs.
B. leading and lagging, receivables and payables, and diversification costs.
C. management costs, corporate costs, liquidity costs, and trading costs.
D. information asymmetry, differential transaction costs, default costs, and progressive corporate taxes.
 
13. A foreign country could provide low cost production sites
 
A. because the factors of production are underpriced.
B. because the currency is undervalued.
C. because the locals like to give away their land labor and capital to foreigners.
D. both a) and b)
 
14. Also, MNCs often find it profitable to locate manufacturing/processing facilities near
 
A. the home office to exploit their assets in place.
B. the natural resources in order to save transportation costs.
C. their competitor’s manufacturing plant to even out the playing field with regard to shipping costs.
D. none of the above
 
15. Companies domiciled in countries with weak investor protection can reduce agency costs between shareholders and management
 
A. having a press conference and promising to be nice to their investors.
B. by listing their stocks in countries with strong investor protection.
C. by moving to a better county.
D. by voluntarily complying with the provisions of the U.S. Sarbanes-Oxley Act.
 
16. The conflicts between the upstream and downstream firms can be resolved
 
A. if the two firms form a horizontally integrated firm.
B. if the two firms form a vertically integrated firm.
C. if the two firms form a linearly integrated firm.
D. none of the above
 
17. If a firm faces progressive tax rates,
 
A. they should spread income out across time and subsidiaries.
B. they should focus on maximizing income in one division or subsidiary.
C. they should manage their income recognition without regard to their taxes.
D. none of the above
 
18. Suppose a U.S.-based MNC maintains a vacation home for employees in the British countryside and the local price of this property is always moving together with the pound price of the U.S. dollar. As a result,
 
A. whenever the pound depreciates against the dollar, the local currency price of this property goes up by the same proportion.
B. the firm is not exposed to currency risk even if the pound-dollar exchange rate fluctuates randomly.
C. both a) and b)
D. none of the above
 
19. An example of forward vertical FDI
 
A. U.S. car makers built their own network of dealerships in Japan to help sell their cars.
B. U.S. car makers began to source parts in Japan to lower the cost of their cars.
C. U.S. car makers entered into joint partnerships with car makers in Japan to help sell their cars.
D. None of the above
 
20. Which of the following are true statements?
 
A. Since translation exposure does not have an immediate direct effect on operating cash flows, its control is relatively unimportant in comparison to transaction exposure, which involves potential real cash flow losses.
B. Since it is generally not possible to eliminate both translation exposure and transaction exposure, it is more logical to effectively manage transaction exposure.
C. Two ways to control translation risk are: a balance sheet hedge and a derivatives “hedge.”
D. All of the above are true statements
 
21. Generally speaking,
 
A. it is not possible to hedge both translation exposure and transaction exposure simultaneously.
B. if a firm can hedge translation exposure then transaction exposure will be simultaneously hedged.
C. if a firm can hedge transaction exposure then translation exposure will be simultaneously hedged.
D. none of the above
 
22. The cost of equity capital is
 
A. the expected return on the firm’s stock that investors require.
B. frequently estimated by using the Capital Asset Pricing Model (CAPM).
C. generally considered to be a linear function of the systematic risk inherent in the security.
D. all of the above
 
23. Sensitivity analysis in the calculation of the adjusted present value (APV) allows the financial manager to
 
A. analyze all of the risks (business, economic, exchange rate uncertainty, political, etc.) inherent in the investment.
B. more fully understand the implications of planned capital expenditures.
C. consider in advance actions that can be taken should an investment not develop as anticipated.
D. all of the above
 
24. Buying a currency option provides
 
A. a flexible hedge against exchange exposure.
B. limits the downside risk while preserving the upside potential.
C. a right, but not an obligation, to buy or sell a currency.
D. all of the above

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25. Your U.S. firm has a £100,000 payable with a 3-month maturity. Which of the following will hedge your liability?
 
A. Buy the present value of £100,000 today at the spot exchange rate, invest in the U.K. at i£.
B. Buy a call option on £100,000 with a strike price in dollars.
C. Take a long position in a forward contract on £100,000 with a 3-month maturity.
D. All of the above
 
26. Operating exposure can be defined as
 
A. the link between the future home currency values of the firm’s assets and liabilities and exchange rate fluctuations.
B. the potential that the firm’s consolidated financial statement can be affected by changes in exchange rates.
C. the sensitivity of realized domestic currency values of the firm’s contractual cash flows denominated in foreign currencies to unexpected exchange rate changes.
D. the extent to which the firm’s operating cash flows would be affected by random changes in exchange rates.
 
27. Cross-border acquisition involves
 
A. building new production facilities in a foreign country.
B. buying existing foreign business.
C. both a) and b)
D. none of the above
 
28. Forfaiting, in which a bank purchases at a discount from an importer a series of promissory notes in favor of an exporter,
 
A. is a short-term form of trade financing.
B. is a medium-term form of trade financing.
C. is a long-term form of trade financing.
D. none of the above
 
29. Consider a U.S. MNC who owns a foreign asset. If the foreign currency value of the asset is inversely related to changes in the dollar-foreign currency exchange rate,
 
A. the company has a built-in hedge.
B. the dollar value variability that is independent of exchange rate movements.
C. both a) and b)
D. none of the above
 
30. From the perspective of the U.S. firm that owns an asset in Britain, the exposure that can be measured by the coefficient b in regressing the dollar value P of the British asset on the dollar/pound exchange rate S using the regression equation is
 
A. asset exposure.
B. operating exposure.
C. accounting exposure.
D. none of the above
 
31. A reduced cost of equity capital increases the firm’s value
 
A. through revaluation of the firm’s existing cash flows from existing projects.
B. through increased investment as more projects become positive NPVs.
C. both a) and b)
D. none of the above
 
32. With regard to foreign currency translation methods used by foreign MNCs,
 
A. foreign currency translation methods are generally only used by U.S.-based MNCs since foreign firms have a built in hedge by being foreign.
B. are generally the same methods used by U.S.-based firms.
C. are exactly the same methods used by U.S.-based firms since GAAP is GAAP.
D. none of the above are true statements.
 
33. If the stock market of a foreign country is consistently up when the dollar value of the currency is down,
 
A. there may not be a great deal of exchange rate risk for a U.S.-based investor.
B. there will be a great deal of exchange rate risk for a U.S.-based investor.
C. then investors can ignore diversification.
D. none of the above
 
34. Suppose the U.S. dollar substantially depreciates against the Japanese yen. The change in exchange rate
 
A. can have significant economic consequences for U.S. firms.
B. can have significant economic consequences for Japanese firms.
C. can have significant economic consequences for both U.S. and Japanese firms.
D. none of the above
 
35. In recent years,
 
A. the U.S. dollar has depreciated substantially against most major currencies of the world, especially against the euro.
B. the U.S. dollar has maintained its value against most major currencies of the world, especially against the euro.
C. the U.S. dollar has appreciated substantially against most major currencies of the world, especially against the euro.
 
36. While maintaining multiple production sites does provide a firm valuable options,
 
A. a firm may miss out on economies of scope.
B. a firm may miss out on economies of scale.
C. a firm may find that exchange rate changes can fully offset the advantage of multiple manufacturing sites.
D. both a) and b)
 
37. With regard to translation exposure versus operating exposure
 
A. upper management should be more concerned with translation exposure.
B. any discussion really involves speculation about foreign exchange rate changes.
C. upper management should be more concerned with operating exposure.
D. none of the above
 
38. An exporter can shift exchange rate risk to their customers by
 
A. invoicing sales in a currency basket such as the SDR as the invoice currency.
B. invoicing in their home currency.
C. invoicing in their customer’s local currency.
D. splitting the difference, and invoicing half of sales in local currency and half of sales in home currency.
 
39. Under which method does the gain or loss due to translation adjustment not affect reported cash flows, as it does with the other three translation methods?
 
A. Current/noncurrent method
B. Monetary/nonmonetary method
C. Current rate method
D. Temporal method
 
40. The primary methods of payment for foreign trades, ranked in the order of most secure to least secure for the exporter is
 
A. cash in advance, letter of credit/ time draft, open account, and consignment.
B. cash in advance, letter of credit/ time draft, consignment, and open account.
C. open account, consignment, letter of credit/time draft, and cash in advance.
D. consignment, letter of credit/time draft, cash in advance, and open account.
 
41. To hedge a foreign currency payable,
 
A. buy put options on the foreign currency.
B. sell call options on the foreign currency.
C. buy call options on the foreign currency.
D. sell put options on the foreign currency.
 
42. A “Greenfield” investment
A. involves soybeans in the spring, corn in the summer.
B. are generally less politically sensitive than the acquisition of an existing foreign firm.
C. are generally more politically sensitive than the acquisition of an existing foreign firm.
D. none of the above
 
43. A banker’s acceptance is created when
 
A. is a document issued by the common carrier specifying that it has received the foods for shipment; it can serve as title to the goods.
B. after taking title to the goods via a bill of lading, the importer’s bank accepts the time draft.
C. a time draft that calls for payment upon physical delivery of goods matures.
D. none of the above
 
44. A time draft can become a negotiable money market instrument called
 
A. a letter of credit.
B. a bill of lading.
C. Eurodollars.
D. a banker’s acceptance.
 
45. Many MNCs involved in extractive/natural resources industries
 
A. tend to directly own oil fields, mine deposits, and forests.
B. tend to lease their oil fields, mine deposits, and forests.
C. tend to partner with local firms, leveraging their intangible assets.
D. none of the above
 
46. Generally speaking, a firm with recurrent exposure can best hedge using which product?
 
A. Options
B. Swaps
C. Futures
D. All of the above
 
47. A typical foreign trade transaction requires three basic documents
 
A. letter of credit, time draft, and bill of lading.
B. letter of credit, banker’s acceptance, and bill of lading.
C. letter of credit, time draft, and a banker’s acceptance.
D. none of the above
 
48. In evaluating the pros and cons of corporate risk management, one argument against hedging is
 
A. if the corporate guys were good at forecasting exchange rates, they would make more money on Wall Street, so only incompetent managers are left at corporations to hedge.
B. shareholders who are diversified have already managed their exchange rate risk.
C. the hedging costs go into someone else’s pocket.
D. none of the above
 
49. The term “countertrade” refers to
 
A. many different types of transactions in which the seller provides a buyer with goods or services and promises in return to purchase goods or services from the buyer.
B. barter, clearing arrangement, and switch trading.
C. buy-back, counter purchase, and offset.
D. all of the above
 
50. Generally speaking, when both a firm’s costs and its price is sensitive to exchange rate changes
 
A. the firm is not subject to high degrees of operating exposure.
B. the firm is subject to high degrees of operating exposure.
C. the firm should hedge.
D. none of the above

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