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International Finance Quiz Name 1. Foreign exchange exposure is a measure of the

ID: 2800687 • Letter: I

Question

International Finance Quiz Name 1. Foreign exchange exposure is a measure of the potential for a firm's profitability, net cash flow, and market value to change because of a change in (a) Cost. (b) Political risk (c) Sale price. (d) Exchange rates 2. Choosing which transaction exposure hedging strategy is best for a particular transaction depends o which of the following? (a) The firm's risk tolerance. (b) The firm's expectations about changes in currency exchange rates. (c) The costs associated with each alternative. (d) All of the above 3. Which following statement is correct? 1. Transaction exposure and operating exposure exist because of expected changes in future cash flow lI. Accounting exposure, also called translation exposure, is the potential for accounting-derived chan in owner's equity to occur because of the need to "translate" foregn currency financial statements foreign subsidiaries into a single reporting currency to prepare worldwide consolidated financial statements e between transaction exposure and operating exposure is that operating exposure concerned with future cash flows already contracted for, while transaction exposure focuses on expected (not yet contracted for) future cash flows that might change because a change in exchang rates has altered international competitiveness. (a) only. (b) Il only. (c) IlIl only. (d) I and II.

Explanation / Answer

Ans.1 d Exchange rates Measurement of a firm's economic exposure to foreign exchange risk-that is, the sensitivity of the firm's economic value, or share price, to exchange rate changes Ans.2 d All of the above The firm's risk tolerance. The firm's expectations about changes in currency exchange rates The costs associated with each alternative Ans.3 b ll only Option a, b, and d are wrong because of the following reasons Transaction exposure and operating exposure exist because of unexpected changes in future cash flow. The difference between transaction exposure and operating exposure is that Transaction exposure concerned with future cash flows already contracted for, while Operating exposure focuses on expected (not yet contracted for) future cash flows that might change in exchange rates has altered international competitiveness. Ans.4 c money market, forward, currency option, no hedge at all

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