For the buyer of a put option the break even Matching currency cash flows is a hedging
spot price is equal to: strategy that seeks to:
Strike price - premium None of the above
Which of the following statements about futures Operating exposure can be managed
contracts and forward contracts is true? strategically through:
Forward contracts are not standardized and trading The diversification of both the operating and
occurs between banks and customers financing base of the MNE.
When the strike price of a put option is greater A currency swap is a hedging strategy that
than the spot price, the put option is said to be: seeks to:
In the None of the above
When the strike price of a put option is equal to Suppose a company sells a good on credit and
the the spot price, the put option is said to be: the price of the good is stated in a foreign
currency. Since the company does not know the
At the money future spot exchange rate, it does not know the
amount of local currency it will receive when
the buyer pays for the good.
Therefore, this transaction generates a
transaction exposure. At which of the following
points in time does the company have
transaction exposure for the first time?
When the company quotes a price to the buyer
If an American investor thinks the Colombian The total period of time during which a firm may
peso will depreciate, he can make a profit by: suffer losses due to transaction exposure can
be divided into three subperiods:
"Going short" Colombian pesos in the futures quotation exposure, backlog exposure and
market billing exposure. Quotation exposure is:
The time between announcing a price to a buyer
and reaching a contractual sale
How can the top executives of a multinational The total period of time during which a firm may
enterprise manage their firm's operating suffer losses due to transaction exposure can
exposure strategically? be divided into three subperiods:
quotation exposure, backlog exposure and
By diversifying the operations and finances of the billing exposure. Billing exposure is:
firm internationally
The time it takes to get paid in cash after an
accounts receivable is issued.
"Leads and lags" refers to a hedging strategy Which of the following statements regarding
that seeks to: transaction exposure and operating exposure is
correct?
Pay invoices in foreign currencies that are
appreciating or depreciating, quicker or slower, in Operating exposure concerns future cash flows not
order to maximize capital. yet contracted for, whereas transaction exposure
concerns cash flows already contracted for.
Which of the following statements regarding Which of the following statements is correct
hedging and speculation is correct? regarding balance sheet hedges?
MNEs normally do not speculate in the market in A balance sheet hedge refers to the process of
order to profit from their expectations about the equalizing the amount of exposed foreign currency
future price of an asset, while speculators take a assets and liabilities on a firm's
position in the market with the expectation of consolidated balance sheet.
making a profit.
Which of the following statements regarding the What are exposed foreign currency assets and
advantages and disadvantages of the two basic liabilities?
translation methods, the current rate method
and the temporal method, is NOT correct? Exposed foreign currency assets or liabilities are
those whose values rise or fall with the appreciation
None of the statements is incorrect. The statements or depreciation of a foreign currency.
above are all correct.
Translation is: When talking about translation exposure, what
is a functional currency?
The process of restating the financial statements of
a foreign subsidiary in order to prepare a The currency in which a subsidiary operates and in
consolidated financial statement in the reporting which it generates cash flows.
currency of the parent company.
Ray Knight is a foreign currency speculator. His Fauci Vaccines Inc., a U.S,-based company, has
latest speculative position is to profit from his concluded a sale of health care equipment and
expectation that the yen will fall significantly supplies to Duesberg Medical, a
against the US dollar. The current spot rate is Germany-based company. Total payment of
0.0094 USD/¥. Each June futures contract has a EUR 1,000,000 is due in 90 days. Due to credit
size of Y 5,000,000 (five million yen) and the concerns of the German banks, Fauci Vaccines
June futures price is currently 0.0093 USD/*. Inc, can only borrow in Germany at 25% per
Should Ray buy or sell June futures contracts? annum. Given the following exchange rates and
What is the value of Ray's position at maturity if interest rates, which of the
he trades three futures contracts and the spot following alternatives is in Fauci Vaccines' best
rate in June is 0.0087 USD/Y? interest?
Ray should sell June futures contracts. The value of
his position at maturity is $9,000
Hedge in the option market
When the spot price is equal to the strike price If an American investor thinks the Colombian
of a call option, the call option is said to be: peso will go up in value; he can make a profit
by:
At the money
“going long" Colombian pesos in the futures market
Comparing options with futures, which of the When the strike price of a call option is greater
following statements is true? than the spot price, the call option is said to be:
None of the above Out of the money
For the writer of a put option the break even Regarding the definition of operating exposure,
spot price is equal to: which of the following statements is correct?
Strike price - premium Any expected change in exchange rates is not
(MENOS) included in the definition of operating exposure
A risk sharing agreement is a hedging strategy Which of the following activities does NOT
that seeks to: generate transaction exposure?
Arrange a contractual relationship between two Having an unequal amount of foreign currency
trading partners to share or split currency assets and liabilities on the firm's consolidated
movement impacts between them balance sheet
The total period of time during which a firm may Which of the following statements about
suffer tosses due to transaction exposure can hedging is NOT correct?
be divided into three subperiods:
quotation exposure, backlog exposure and A firm that hedges increases the variance in the
billing exposure. Backlog exposure is: value of its expected future cash flows
The time it takes to fill the order after the contract is
signed
Under the temporal method: How do parent firms choose the method to
translate the statements of their subsidiaries?
All monetary assets are translated at the exchange
rate in effect on the balance sheet date It depends on the country in which the parent firm
is based. In some countries parent firms are
required to choose translation
method based on the characteristics of their
subsidiaries, while in other countries parent firms
are required to choose translation
method based on the functional currency of each of
their subsidiaries
Ray Knight is a foreign currency speculator. His Buenos Aires Products, S.A, is the Argentinian
latest speculative position is to profit from his subsidiary of a U.S manufacturing company. Its
expectation that the yen will fall balance sheet for January 1st follows.
significantly against the US dollar The current The January 1st exchange rate between the
spot rate is 000P4 USD/Y. Each Jume futures U,S. dollar and the Argentinian peso is 1.00
contract has a size of * 5,000,000 (five Ps/$.
million yen) and the June futures price is
currently 0,0093 USD/Y. Should Ray buy or sell
June futures contracts? What is the value of
Ray's position at maturity if he trades three
futures contracts and the spot rate in June is
0,0087 USD/Y?
None of the above is fully correct
(Cuando la opciones son con 3,000)
1. Determine Buenos Aires Products'
contribution to the translation exposure of its
parent on January 1, using the current rate
method.
2. Calculate Buenos Aires Products'
contribution to its parent translation gain or
loss if the exchange rate on December 31 is
3,20 Ps/$.
Assume that all peso accounts remain as they
were at the beginning of the year. (note: the
translation method is the current rate
method as indicated above).
Buenos Aires Products’ contribution to the
translation exposure of its parent is $210,000;
Contribution to translation gain or loss
equals -$144,375.
Foreign exchange future contracts are: Derivatives are:
An alternative to forward contracts that call for the Financial contracts whose value is derived from an
future delivery of standard amount of foreign underlying asset.
exchange at a fixed time, place
and price
Many of the world's largest industrial countries Ron Darling is a foreign currency speculator.
follow the same basic translation procedure. His latest speculative position is to profit from
According to this procedure: his expectation that the yen will rise
significantly against the USD. The current spot
An integrated foreign entity typically uses the rate is 0.0094 USD/V. He must choose between
temporal method of translation whereas a a June call option with a strike price of
self-sustaining foreign entity typically 0.0093 USD/V and a premium of 0.00002 USD/X
uses the current rate method of translation and a June put option with a strike price of
0.0093 USD/Y and a premium of 0.00001
USD/V. Shoüld Ron buy a June call option on
the yen or a June put option on the yen? Each
option contract has a size of ¥5,000,000
(five million yen). What is Ron's net profit if he
trades five contracts and the spot rate in June
is 0.0087 USD/Y?
Medical Storehouse Inc., a U.S,-based company, Counter-party risk with derivatives is the risk
has concluded a sale of health care equipment that:
and supplies to Wellcome Trust Pic, a
U.K,-based company. Total payment of The other party involved in the contract will not pay
£1,000,000 is due in 90 days. Given the or deliver what was agreed on within the contract.
following exchange rates and interest rates,
which of
the following alternatives is.in Medical
Storehouse's best interest?
Hedge in the money market
Which of the following statements about Taking into account that to lead means to pay
derivatives is false? early and that to lag means to pay late. Which
of the following statements, regarding a
They involve no risk firm that follows a "leads and lags” policy, is
correct?
When the firm holds a hard currency and has debts
denominated in a soft currency it will lag
When two parent firms in separate countries When are matching hedges effective?
arrange to borrow each other's currency for a
specific period of time to finance their When the exposure cash flows denominated in
subsidiaries abroad, this policy is called: foreign currency are relatively constant and
Back-to-back loans predictable over time.
Buenos Aires Products, S.A., is the Argentinian Tom Herr is a foreign currency speculator. His
subsidiary of a U.S, manufacturing company. Its latest speculative position is to profit from his
balance sheet for January 1st follows expectation that the euro will fall significantly
The January 1st exchange rate between the US. against the US dollar. The current spot rate is
dollar and the Argentinian peso is 1.00 Ps/S. 1.09 USD/EUR. Each June futures contract has
a size of EUR 60,000, and the June futures price
is currently 1.08 USD/EUR. Should Tom buy or
sell one June futures contract? What is the
value of his position at maturity if the spot rate
in June is 1.04 USD/EUR?
Tom should sell one June futures contract; the
value of his position at maturity is $2,400
1. Determine Buenos Aires Products'
contribution to the translation exposure of its
parent on January 1, using the current rate
method.
2. Calculate Buenos Aires Products'
contribution to its parent translation gain or
loss if the exchange rate on December 31 is 3.00
Ps/$.
Assume that all peso accounts remain as they
were at the beginning of the year. (Note: the
translation method is the current rate
method as indicated above).
Buenos Aires Products' contribution to the
translation exposure of its parent is $110,000;
Contribution to translation gain or loss
equals -$73.333
Select the statement that most accurately The exchange rate between the dollar and the
reflects the differences between the peso on March 24th 2020 was 4176
shareholder wealth maximization model (SWM) COP/USD. On May 24th 2020, the exchangerate
and the stakeholder capitalism model was 3775 COP/USD. If the USD is
(SCM). our home currency, what is the percentage
change in the exchange rate between
Both models attach importance to generating these two dates? Choose the answer with the
returns for investors, however the SCM places correct currency terminology.
more emphasis on protecting important stakeholder
groups The COP appreciated 10.62% against the USD.
Assuming the Russian government operates a Today we have an exchange rate of 2.2 Brazilian
flexible (floating) exchange rate, and Reals/US$ (the US$ is the home
last week's exchange rate was 34.05 Russian currency). Suppose that tomorrow the Brazilian
rubles per US dollar. If the exchange Reals decrease in value by 15%.
rate changes this week to 37.34 Russian rubles What is the new exchange rate?
per US dollar we can say:
2.59 reals/US$
There has been a depreciation of the ruble against
the dollar
Agency theory is concerned with: Which of the following statements about
translation methods is correct?
The study of how shareholders can motivate
management to maximize returns to shareholders. Under the current rate method translation gains or
losses are NOT included in
the calculation of consolidated net income. Rather,
translation gains or losses are reported separately
and accumulated in a separate equity reserve
account with a
title such as cumulative translation adjustment
If the net profit for the writer of a call option Statement 1; A currency option can protect a
equals the premium, this means that firm against adverse currency
the call option expired: movements.
At the money. Statement 2; However, a currency option would
not enable the firm to participate in some of the
upside potential.
Both are false!
What is the payoff for the buyer of a call option Statement 1: Hedging is the taking of a position
if the call option expire at the that will rise (fall) in value to offset a
money? fall (rise) in value of an existing position
The net profit for the buyer of the call option equals Statement 2: Companies only hedge to protect
the premium. against foreign exchange rate
movements, they never hedge to protect
against movements in commodity prices or
interest rates
Statement 1 true, 2 false
Which of the following statements about beta is If a firm can issue a new security without
false? depressing the market price of its existing
securities, we can conclude that:
It measures the unique or individual risk of a
company. The market is liquid
Which of the following statements about cost A company should not use the weighted
and availability of capital is correct? average cost of capital (WACC) as the risk-
adjusted discount rate to evaluate a new project
Segmentation results in less availability of capital when:
and a higher cost of capital
The company's new project is not in the same risk
class as its existing projects.
Statement 1: The Weighted Average Cost of Statement 1: Level Il ADR programs allow
Capital (WACC) gives the weighted foreign companies to sell new equity
average cost for a company of raising finance shares on a U.S. exchange.
through both equity and debt.
Statement 2: Level I ADR programs have the
Statement 2: Companies use their WACC as the easiest and least restrictive listing
risk-adjusted discount rate when requirements.
evaluating the prospects of a new project which
is in the same risk class as its Statement 1 is false while statement 2 is true.
existing projects.
Both statements are correct
Statement 1: American Depositary Receipts Select the statement that best describes the
(ADRs) can be exchanged for the potential disadvantages of licensing
underlying foreign shares, or vice versa compared to Foreign Direct Investment (FD)).
Statement 2: Each ADR represents some All of the above are potential disadvantages to
multiple of the underlying foreign share. licensing.
Both statements are correct
Which of the following statements about joint The L in the OLi paradigm refers to:
ventures is correct?
Location-specificadvantages
Joint ventures are not as common as wholly owned
subsidiaries because MNEs
fear interference by the local partner in certain
critical decision areas.
Select the statement that best reflects the Which of the following is a location-specific
justification for a strategic alliance. advantage for an MNE.
All of the above are legitimate reasons for strategic Economies of scale.
alliances.
The following statements refer to Triangular The price of an Audi in Germany is €45,000. At
Arbitrage. Which of the following today's exchange rate of €1.50/E
statements is correct: the price of the Audi imported into the UK is
£30,000. In one year the exchange
For arbitrage profits to exist the cross rate and rate changes to €1.10/E (note* E is the home
actual quoted rate must be currency). If the price of the car in
different. Germany remains at €45,000 but now the price
in the UK has increased to
€35,000 we can conclude the following
There has been a pass through of 46%
An American firm is attempting to determine the Other things being equal, the more foreign
dollar/pound exchange rate but only has the exchange reserves a country has in its
following exchange rate information: possession, the easier it is for that country to
Euro/pound = €1.2239/E and sustain a fixed exchange rate regime.
the USD/euro rate = $1.3195/€. Therefore, the
dollar/pound rate must be: The statement is correct.
$1.6149/€
If the net profit for the writer of a put option Which of the following statements with respect
equals the premium, what is the to futures and forwards is true:
payoff for the buyer of that put option?
All of the above
The buyer of the put option has a net loss equal to
the premium.
What is the payoff for the buyer of a put option What is the payoff for the buyer of a call option
it the put option expires out of the if the call option expires at the
money? money?
The net loss for the buyer of the put equals the The net loss for the buyer of the call option equals
premium. the premium
What is the payoff for the buyer of a call option Statement 1: Hedging is the taking of a position
if the spot price at maturity that will rise (fall) in value to
equals the breakeven price? offset a fall (rise) in value of an existing
position
The net profit for the buyer of the call option equals
zero Statement 2 Companies only hedge to protect
against foreign exchange rate
movements, they never hedge to protect
against movements in commodity
prices or interest rates
Statement 1 is correct but the statement 2 is false
If the beta of a security is greater than one, this There are barriers to cross-listing and selling
means that equity abroad, especially in the US,
Barriers include the commitment to provide full
The returns of the secunty are more volatile (or and transparent disclosure of
risky) than those of the market portfolio of stocks. financial information. According to US experts,
how can firms beneft from full
and transparent disclosure of financial
information?
Firms can benefit because full and transparent
disclosure of financial information helps lower their
cost of capital
How can ADR issuers make ADR pricing Since US markets are very liquid and are not
resemble conventional US share segmented, how can US firms benefit by
pricing? issuing equity abroad?
By making each ADR represent a multiple of the None of the above.
underlying foreign share
Cross-border valuations and acquisitions pose Which of the following is an advantage of joint
particularly difficult problems in ventures compared to wholly
emerging markets because: owned subsidiaries?
There are often restrictions and barriers placed on The partner can enhance access to the
foreign investors. host-country's capital markets
Select the statement that best reflects the Which of the following statements regarding
justification for a strategic alliance. greenfield investments is correct?
All of the above are legitimate reasons for strategic Greenfield investments are typically slower but
alliances. easier to manage compared to cross-border
acquisitions
The O in OLI refers to an advantage in a firm's According to the international Fischer effect:
home market that is
The spot exchange rate should change in an equal
Owner-specific amount and in the opposite
direction to the difference in interest rates between
two countries.
When firms invest internationally the literature Which of the following statements is a fair
refers to varios behavioral description of the key difference between
observations that tend to occur. Select the fixed and floating exchange rates?
statement which is NOT normally
observed. Fixed exchange rates have traditionally been used
by countries to control high
Initial investments tend to be much larger than inflation however this has come at the expense of
subsequent ones losing control over monetary
policy.
A balance sheet hedge, used to mitigate A speculator wanting to go short the Mexican
translation exposure, consists in: peso could use the following strategy:
Taking measures to ensure foreign currency assets Sell Mexican peso using a futures contract
and liabilities on the company's balance sheet are
equal in value.
Which of the following is an advantage of A cross-border acquisition has a number of
exporting goods to reach international significant advantages to Greenfield
markets compared to FDI? acquisitions. Some of them are:
Lower agency costs A and C are correct.
A. Cross-border acquisitions are often quicker,
reduce the time required to obtain a foothold in the
market, and facilitate competitive entry into the
market.
C. Cross-border acquisitions make gaining
competitive advantages in areas such as
technology, brand names, and/or
logistic/distribution capabilities more
cost-effective, while also eliminating a local
competitor.
After acquiring a firm in an overseas market the Which of the following statements represents an
business operations and employees are easy to economy of scale?
manage.
B. The ability to use large-scale plant and
The statement is false. equipment.
When firms invest internationally the literature
refers to various behavioral
observations that tend to occur. Select the
statement which is NOT normally
observed.
B. Initial investments tend to be smaller than
subsequent ones.
