1. Economic exposure is based on the extent to which currency changes change
a. the value of the firm's balance sheet assets and liabilities.
b. the settlement of existing transactions.
c. future cash flows and the market value of the firm.
d. prices in the currency futures and options markets.
2. A company producing an undifferentiated product and competing with internationally diversified competitors will face a relatively price elasticity of demand for its products and possess a relatively degree of pricing flexibility.
a. high; low
b. low; low
c. low; high
d. high; high
3. Exchange rate pass-through may be defined as
a. the bid/ask spread on currency exchange rate transactions.
b. the degree to which the price of imports change as a result of exchange rate changes.
c. the PPP of less-developed countries.
d. the practice by a country to maintain a relative stable exchange rate.
4. In a The Wall Street Journal article ("A Matter of Exchange Rates," June 21, 1994), John F. Welch, chairman and CEO of General Electric, said that "If the Japanese are preparing to compete at yen to the dollar, the U.S. must be ready to compete at yen. Until we are, we delude ourselves."
a. 90; 90
b. 130; 90
c. 90; 130
d. 130; 130
5. "The reduction in the value of the peso not only makes the earnings of Pepsi's Mexican operations valuable in dollar terms, but it also makes the company's product competitive by reducing local demand if PepsiCo is forced to raise prices." ("Dollar to Play A Central Role in Profit Data," by Michael Gonzalez, The Wall Street Journal, April 17, 1995, P. C1.)
a. more; more
b. more; less
c. less; more
d. less; less
6. What type of international risk exposure measures the change in the value of a firm resulting from changes in future operating cash flows caused by any unexpected change in exchange rates?
a. Transaction exposure.
b. Accounting exposure.
c. Operating exposure.
d. Translation exposure.
7. The goal of operating exposure analysis is to identify strategic operating techniques and strategies that the firm might adopt to enhance value in the face of unanticipated exchange rate changes.
a. True
b. False
8. exposure is far more important for the long-run health of a business than changes caused by or exposure.
a. Operating; translation, transaction
b. Transaction; operating, translation
c. Accounting; translation, transaction
d. Translation; operating, transaction
9. Under conditions of equilibrium in the foreign exchange market, management would use the exchange rate as an unbiased predictor of future spot rates when preparing operating budgets.
a. current spot
b. forward rate
c. black market
d. historical
10. From an investor's perspective, if the foreign exchange market is efficient, information about expected changes in exchange rates should be widely known and thus reflected in a firm's market value. Only in exchange rates or an foreign exchange market, should cause market value to change.
a. expected changes; efficient
b. unexpected changes; efficient
c. expected changes, inefficient
d. unexpected changes; inefficient
11. Which one of the following management techniques is likely to best offset the risk of long- run exposure to receivables denominated in a particular foreign currency?
a. Borrow money in the foreign currency in question.
b. Lend money in the foreign currency in question.
c. Increase sales to the country where the receivables are generated.
d. Increase sales in the firm's home county.
12. Which one of the following management techniques is likely to best offset the risk of long- run exposure to payables denominated in a particular foreign currency?
a. Borrow money in the foreign currency in question.
b. Lend money in the foreign currency in question.
c. Rely on the Fed to enact monetary policy favorable to your exposure risk.
d. Borrow money in the home currency.
13. A U.S. timber products firm has a long-term contract to import unprocessed logs from Canada. To avoid occasional and unpredictable changes in the exchange rate between the U.S. dollar and the Canadian dollar, the firms agree to split between the two firms the impact of any exchange rate movement. This type of agreement is referred to as .
a. risk-sharing
b. currency-switching
c. matching
d. a natural hedge
14. A is the term used to describe a foreign currency agreement between two parties to exchange a given amount of one currency for another, and after a period of time, to give back the original amounts.
a. matched flow
b. currency swap
c. currency switching
15. At the beginning of 2004, firms in the Eurozone were concerned about the euro appreciation against the dollar. According to a report by the Washington Post, "Two years ago an American museum ordered a case for $10,000 [from Germany], for delivery now [January 2004]. Under current exchange rates the case would be priced closer to $13,000 -- but the customer still expects to pay the old price." (John Burgess, "Rising Euro Tests European Unity - Some Countries Complain of Falling Exports; Others Cite the Benefits of a Strong Currency," Washington Post, Saturday, January 24, 2004, Page A13.) Which of the following is NOT true about the euro appreciation against the dollar?
a. All else being equal, euro appreciation makes the U.S. more attractive for Eurozone tourists.
b. All else being equal, euro appreciation reduces earnings of companies in the Eurozone from their U.S. operations.
c. All else being equal, euro appreciation raises the real exchange rate of the euro against the dollar.
d. All else being equal, euro appreciation lowers the price U.S. imports from the Eurozone and hurts the U.S. trade balance.
16. Reuters reported on January 24, 2004: "The United States is sucking in imports from all over the world, driving up the U.S. current account deficit as Americans borrow heavily. This, combined with the huge U.S. budget deficit, is forcing down the value of the U.S. dollar in currency markets. The euro is bearing the brunt of the dollar's fall, rising 20 percent last year." (Stella Dawson, "Global Business Leaders Fret About Growth," Reuters, Saturday, January 24, 2004). It appears that a value change of 20% or more within one year has been a frequent occurrence in the foreign exchange market. If the euro appreciates 20% against the dollar, which of the following is TRUE for a Eurozone exporter to the U.S.?
a. If the exporter adopts a pricing to market strategy, its euro profits will go up.
b. If the exporter adopts a complete pass-through strategy, its sales in the U.S. will go up.
c. If the price elasticity of demand for its product in the U.S. is 3, and the exporter keeps its euro price unchanged, its sales volume in the U.S. will decrease by 60%.
d. If the price elasticity of demand for its product in the U.S. is 3, and the exporter follow complete exchange rate pass-through, its sales volume will increase by 60%.
Refer to the following information for Questions 17 to 20.
|
Assumptions
|
2015
|
2016
|
2017
|
2018
|
2019
|
|
Sales volume (units)
|
1,000,000
|
1,000,000
|
1,000,000
|
1,000,000
|
1,000,000
|
|
Sales price per unit
|
Fr. 12.80
|
Fr. 12.80
|
Fr. 12.80
|
Fr. 12.80
|
Fr. 12.80
|
|
Direct cost per unit
|
Fr. 9.60
|
Fr. 9.60
|
Fr. 9.60
|
Fr. 9.60
|
Fr. 9.60
|
|
Swiss corporate tax rate
|
29.5%
|
29.5%
|
29.5%
|
29.5%
|
29.5%
|
|
Exchange rate (Fr/€)
|
1.2000
|
1.2000
|
1.2000
|
1.2000
|
1.2000
|
|
Income Statement
|
2015
|
2016
|
2017
|
2018
|
2019
|
|
Sales revenue
|
Fr. 12,800,000
|
Fr. 12,800,000
|
Fr. 12,800,000
|
Fr. 12,800,000
|
Fr. 12,800,000
|
|
Direct cost of goods sold
|
-9,600,000
|
-9,600,000
|
-9,600,000
|
-9,600,000
|
-9,600,000
|
|
Cash operating expenses (fixed)
|
-890,000
|
-890,000
|
-890,000
|
-890,000
|
-890,000
|
|
Depreciation
|
-600,000
|
-600,000
|
-600,000
|
-600,000
|
-600,000
|
|
Pretax profit
|
Fr. 1,710,000
|
Fr. 1,710,000
|
Fr. 1,710,000
|
Fr. 1,710,000
|
Fr. 1,710,000
|
|
Income tax expense
|
-504,450
|
-504,450
|
-504,450
|
-504,450
|
-504,450
|
|
Net income
|
Fr. 1,205,550
|
Fr. 1,205,550
|
Fr. 1,205,550
|
Fr. 1,205,550
|
Fr. 1,205,550
|
|
Operating Cash Flows
|
|
|
|
|
|
|
Net income
|
Fr. 1,205,550
|
Fr. 1,205,550
|
Fr. 1,205,550
|
Fr. 1,205,550
|
Fr. 1,205,550
|
|
Add back depreciation
|
600,000
|
600,000
|
600,000
|
600,000
|
600,000
|
|
Changes in net working capital
|
0
|
0
|
0
|
0
|
0
|
|
Cash flow from operations
|
Fr. 1,805,550
|
Fr. 1,805,550
|
Fr. 1,805,550
|
Fr. 1,805,550
|
Fr. 1,805,550
|
|
Cash flow from operations, in euro
|
€ 1,504,625
|
€ 1,504,625
|
€ 1,504,625
|
€ 1,504,625
|
€ 1,504,625
|
|
Present Value @ 15%
|
€ 5,043,736
|
|
|
|
|
A German company has a subsidiary in Switzerland. The subsidiary produces a particular product in Switzerland and sells it in the Eurozone. At the beginning of 2015, the exchange rate between the euro and the Swiss franc (Fr) is Fr1.20/€. The expected cash flows (the baseline case) from the Swiss subsidiary for the next five years are presented in the table below.
Assume that the subsidiary has no change in net working capital. Cash operating expenses and depreciation are given. Cost of capital remains constant.
17. On January 15, 2015, the Swiss National Bank (SNB) removes the exchange rate cap and the euro falls immediately to Fr1.00/€ and is expected to stay at around this level for the feasible future. Assuming complete exchange rate pass-through, what is the relative price of Swiss exports in the Eurozone?
18. Assuming that the inflation rates in the Eurozone and in Switzerland have been 1.5% and are expected to remain at 1.5% for the foreseeable future, what is the real exchange rates of the Swiss franc after January 15, 2015?
19. Assume that the subsidiary keeps sales price and cost per unit in Swiss franc unchanged and the price elasticity of demand for the product in the Eurozone is 2. What is the PV of the expected operating cash flows from the Swiss subsidiary after the exchange rate change?
20. Assume that the subsidiary chooses to price to market and keeps its sales price per unit in euro unchanged, and everything else the same. What is the PV of the expected operating cash flows from the Swiss subsidiary after the exchange rate change?