1. The primary method by which a firm may hedge itself against the operating exp
ID: 2752721 • Letter: 1
Question
1. The primary method by which a firm may hedge itself against the operating exposure is a. diversification b. forward contract hedge c. money market hedge d. options contract hedge 2. When an enterprise has a receivable denominated in a foreign currency and settlement of the obligation has not yet taken place, which firm is said to have a. accounting exposure b. transaction exposure c. economic exposure d. operating exposure 3. Operating exposure a. creates foreign exchange accounting gains or losses b. cause exchange rates to fluctuate c. is the possibility that future cash flows will change due to an unexpected change in foreign exchange rates d. all of the above 4. An advantage of international diversification is the a. reduction of the variability of future cash flows due to domestic business cycle b. increase in availability of capital c. all of the above d. none of the above 5. An unexpected change in exchange rates impacts a firm’s expected cash flows at what level(s)? a. short run b. medium run, equilibrium case c. medium run, disequilibrium case d. long run e. all of the above 6. All of the following operating strategies are used for the management of operating exposure except a. leads and lags b. netting c. parallel loans d. debts swap equities 7. All of the following are types of swaps agreements except a. back-to-back loan b. currency swaps c. interest rate swaps d. none of the above 8. The main technique to manage translation exposure is a a. forward market contract b. money market hedge c. balance sheet hedge d. foreign currency options hedge 9. The cost of capital for a multinational firm can be influenced by all of the following except: a. availability of capital b. segmented national capital market C. taxation policies d. foreign exchange and political risks e. all of the above are correct 10. _______ is a financial market imperfection caused by government constraints a. Market segmentation b. market liquidity c. marginal cost od capital d. market efficiency
Explanation / Answer
Correct Answer - a
Correct Answer - b. The company has already entered into the transaction and the exchange rate fluctuations affect this particular transaction only
Correct Answer - c
Correct Answer - b
Correct answer – e. The unexpected change exchange rates can affect a firm’s expected cash flows at all levels
Correct answer - d debts swap equities pertains to swapping debt with equity (conversion of debt to equity) to help a company improve its financial position which is not used in managing operating exposure
Correct answer – d
Correct answer is C. All others are used for specific transactions
Correct answer – b This only denotes the state of the capital market
Correct answer is b – market liquidity is affected by government constraints
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