International Financial Management, Abridged 12th Edition by Madura – Test Bank

Chapter 12—Managing Economic Exposure and Translation Exposure

1. Depreciation of the euro relative to the U.S. dollar will cause a U.S.-based multinational firm’s reported earnings (from the consolidated income statement) to ____. If a firm desired to protect against this possibility, it could stabilize its reported earnings by ____ euros forward in the foreign exchange market.
a. be reduced; purchasing
b. be reduced; selling
c. increase; selling
d. increase; purchasing

ANS: B PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.12.04
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Comprehension

2. Springfield Co., based in the U.S., has a cost from orders of foreign material that exceeds its foreign revenue. All foreign transactions are denominated in the foreign currency of concern. This firm would ____ a stronger dollar and would ____ a weaker dollar.
a. benefit from; be unaffected by
b. benefit from; be adversely affected by
c. be unaffected by; be adversely affected by
d. be unaffected by; benefit from
e. benefit from; benefit from

ANS: B PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.12.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Comprehension

3. Whitewater Co. is a U.S. company with sales to Canada amounting to C$8 million. Its cost of materials attributable to the purchase of Canadian goods is C$6 million. Its interest expense on Canadian loans is C$4 million. Given these exact figures above, the dollar value of Whitewater’s “earnings before interest and taxes” would ____ if the Canadian dollar appreciates; the dollar value of Whitewater’s cash flows would ____ if the Canadian dollar appreciates.
a. increase; increase
b. decrease; increase
c. decrease; decrease
d. increase; decrease
e. increase; be unaffected

ANS: D PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.12.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Comprehension

4. Sycamore (a U.S. firm) has no subsidiaries and presently has sales to Mexican customers amounting to MXP98 million, while its peso-denominated expenses amount to MXP41 million. If it shifts its material orders from its Mexican suppliers to U.S. suppliers, it could reduce peso-denominated expenses by MXP12 million and increase dollar-denominated expenses by $800,000. This strategy would ____ the Sycamore’s exposure to changes in the peso’s movements against the U.S. dollar. Regardless of whether the firm shifts expenses, it is likely to perform better when the peso is valued ____ relative to the dollar.
a. reduce; high
b. reduce; low
c. increase; low
d. increase; high

ANS: D PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.12.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Comprehension

5. Which of the following is an example of economic exposure but not an example of transaction exposure?
a. An increase in the dollar’s value hurts a U.S. firm’s domestic sales because foreign competitors are able to increase their sales to U.S. customers.
b. An increase in the pound’s value increases the U.S. firm’s cost of British pound payables.
c. A decrease in the peso’s value decreases a U.S. firm’s dollar value of peso receivables.
d. A decrease in the Swiss franc’s value decreases the dollar value of interest payments on a Swiss deposit sent to a U.S. firm by a Swiss bank.

ANS: A PTS: 1 DIF: Easy OBJ: INFM.MADU.15.12.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Knowledge

6. Rockford Co. is a U.S. manufacturing firm that produces goods in the U.S. and sells all products to retail stores in the U.K.; the goods are denominated in pounds. It finances a small portion of its business with pound-denominated loans from British banks. Which of the following is true? (Assume that the amount of products to be sold is guaranteed by contracts.)
a. The dollar value of sales is higher if the pound depreciates against the dollar.
b. The dollar value of sales is unaffected by the pound’s exchange rate.
c. A and B
d. None of the above

ANS: D PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.12.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Comprehension

7. If a U.S. firm’s expenses are more susceptible to exchange rate movements than revenue, the firm will ____ if the dollar ____.
a. benefit; weakens
b. be unaffected; weakens
c. be unaffected; strengthens
d. benefit; strengthens

ANS: D PTS: 1 DIF: Easy OBJ: INFM.MADU.15.12.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Comprehension

8. Laketown Co. has some expenses and revenue in euros. If its expenses are more sensitive to exchange rate movements than revenue, it could reduce economic exposure by ____. If its revenues are more sensitive than expenses, it could reduce economic exposure by ____.
a. decreasing foreign revenues; decreasing foreign expenses
b. decreasing foreign revenues; increasing foreign expenses
c. increasing foreign revenues; decreasing foreign revenues
d. decreasing foreign expenses; increasing foreign revenues

ANS: D PTS: 1 DIF: Easy OBJ: INFM.MADU.15.12.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Comprehension

9. Any restructuring of operations that ____ the difference between a foreign currency’s inflows and outflows may ____ economic exposure.
a. reduces; increase
b. increases; reduce
c. reduces; reduce
d. A and B
e. none of the above

ANS: C PTS: 1 DIF: Easy OBJ: INFM.MADU.15.12.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Comprehension

10. It is generally least difficult to effectively hedge various types of:
a. translation exposure.
b. transaction exposure.
c. economic exposure.
d. A and C

ANS: B PTS: 1 DIF: Easy OBJ: INFM.MADU.15.12.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Knowledge