Multinational Financial Management – Exam 3 (MC), 2026 –
Study Material and Practice Questions
The potential exposure that any individual firm bears that the second party to any financial
contract will be unable to fulfill its obligations under the contract is called: - ANS✔✔
counterparty risk
Counterparty risk is greater for exchange - traded derivatives than for over-the-counter -
ANS✔✔ False
Swap rates are derived from the yield curves in each major currency - ANS✔✔ True
___________ exposure deals with cash flows that result from existing contractual obligations. -
ANS✔✔ Transaction
___________ exposure measures the change in the present value of the firm resulting from
unexpected changes in exchange rates - ANS✔✔ Operating
Each of the following is another name for operating exposure EXCEPT: - ANS✔✔ accounting
exposure
Transaction exposure and operating exposure exist because of unexpected changes in future
cash flows. The difference between the two is that ___________ exposure deals with cash flows
already contracted for, while ___________ exposure deals with future cash flows that might
change because of changes in exchange rates. - ANS✔✔ transaction; operating
_____________ exposure is the potential for accounting-derived changes in owner's equity to
occur because of the need to translate foreign currency financial statements into a single
reporting currency. - ANS✔✔ Accounting (aka translation)
,Losses from __________ exposure generally reduce taxable income in the year they are
realized. _____________ exposure losses are not cash losses and therefore, are not tax
deductible. - ANS✔✔ transaction; Translation
MNE cash flows may be sensitive to changes in which of following? - ANS✔✔ All: interest rates,
commodity prices, exchange rates
Assuming no transaction costs (i.e., hedging is "free"), hedging currency exposures should
__________ the variability of expected cash flows to a firm and at the same time, the expected
value of the cash flows should _____________. - ANS✔✔ decrease; not change
Which of the following is NOT cited as a good reason for hedging currency exposures? - ANS✔✔
Currency risk management increases the expected cash flows to the firm.
Which of the following is cited as a good reason for NOT hedging currency exposures? - ANS✔✔
All of the above: Hedging activities are often of greater benefit to management than to
shareholders; Shareholders are more capable of diversifying risk than management; Currency
risk management through hedging does not increase expected cash flows.
The stages in the life of a transaction exposure can be broken into three distinct time periods.
The first time period is the time between quoting a price and reaching an actual sale agreement
or contract. The next time period is the time lag between taking an order and actually filling or
delivering it. Finally, the time it takes to get paid after delivering the product. In order, these
stages of transaction exposure may be identified as: - ANS✔✔ quotation, backlog, and billing
exposure
A U.S. firm sells merchandise today to a British company for 150,000 pounds. The current
exchange rate is $1.55/pound, the account is payable in three months, and the firm chooses to
avoid any hedging techniques designed to reduce or eliminate the risk of changes in the
exchange rate. The U.S. firm is at risk today of a loss if: - ANS✔✔ all of the above: the exchange
, rate doesn't change; the exchange rate changes to $1.58/pound; the exchange rate changes to
$1.52/pound.
A U.S. firm sells merchandise today to a British company for 150,000 pounds. The current
exchange rate is $1.55/pound, the account is payable in three months, and the firm chooses to
avoid any hedging techniques designed to reduce or eliminate the risk of changes in the
exchange rate. If the exchange rate changes to $1.58/pound the U.S. firm will realize a
___________ of ____________. - ANS✔✔ gain; $4,500
A U.S. firm sells merchandise today to a British company for 150,000 pounds. The current
exchange rate is $1.55/pound, the account is payable in three months, and the firm chooses to
avoid any hedging tecnhiques designed to reduce or eliminate the risk of changes int eh
exchange rate. If the exchange rate changes to $1.52/pound the U.S. firm will realize a
___________ of ___________. - ANS✔✔ loss; $4,500
____________ is NOT a commonly used contractual hedge against foreign exchange transaction
exposure. - ANS✔✔ All of the above: forward market hedge, money market hedge, options
market hedge
A _________ hedge refers to an offsetting operating cash flow such as a payable arising from
the conduct of business - ANS✔✔ natural
As a generalized rule, only realized foreign exchange losses are deductible for tax purposes -
ANS✔✔ True
Hedging, or reducing risk, is the same as adding value or return to the firm - ANS✔✔ False
There is considerable question among investors and managers about whether hedging is a good
and necessary tool - ANS✔✔ True
Study Material and Practice Questions
The potential exposure that any individual firm bears that the second party to any financial
contract will be unable to fulfill its obligations under the contract is called: - ANS✔✔
counterparty risk
Counterparty risk is greater for exchange - traded derivatives than for over-the-counter -
ANS✔✔ False
Swap rates are derived from the yield curves in each major currency - ANS✔✔ True
___________ exposure deals with cash flows that result from existing contractual obligations. -
ANS✔✔ Transaction
___________ exposure measures the change in the present value of the firm resulting from
unexpected changes in exchange rates - ANS✔✔ Operating
Each of the following is another name for operating exposure EXCEPT: - ANS✔✔ accounting
exposure
Transaction exposure and operating exposure exist because of unexpected changes in future
cash flows. The difference between the two is that ___________ exposure deals with cash flows
already contracted for, while ___________ exposure deals with future cash flows that might
change because of changes in exchange rates. - ANS✔✔ transaction; operating
_____________ exposure is the potential for accounting-derived changes in owner's equity to
occur because of the need to translate foreign currency financial statements into a single
reporting currency. - ANS✔✔ Accounting (aka translation)
,Losses from __________ exposure generally reduce taxable income in the year they are
realized. _____________ exposure losses are not cash losses and therefore, are not tax
deductible. - ANS✔✔ transaction; Translation
MNE cash flows may be sensitive to changes in which of following? - ANS✔✔ All: interest rates,
commodity prices, exchange rates
Assuming no transaction costs (i.e., hedging is "free"), hedging currency exposures should
__________ the variability of expected cash flows to a firm and at the same time, the expected
value of the cash flows should _____________. - ANS✔✔ decrease; not change
Which of the following is NOT cited as a good reason for hedging currency exposures? - ANS✔✔
Currency risk management increases the expected cash flows to the firm.
Which of the following is cited as a good reason for NOT hedging currency exposures? - ANS✔✔
All of the above: Hedging activities are often of greater benefit to management than to
shareholders; Shareholders are more capable of diversifying risk than management; Currency
risk management through hedging does not increase expected cash flows.
The stages in the life of a transaction exposure can be broken into three distinct time periods.
The first time period is the time between quoting a price and reaching an actual sale agreement
or contract. The next time period is the time lag between taking an order and actually filling or
delivering it. Finally, the time it takes to get paid after delivering the product. In order, these
stages of transaction exposure may be identified as: - ANS✔✔ quotation, backlog, and billing
exposure
A U.S. firm sells merchandise today to a British company for 150,000 pounds. The current
exchange rate is $1.55/pound, the account is payable in three months, and the firm chooses to
avoid any hedging techniques designed to reduce or eliminate the risk of changes in the
exchange rate. The U.S. firm is at risk today of a loss if: - ANS✔✔ all of the above: the exchange
, rate doesn't change; the exchange rate changes to $1.58/pound; the exchange rate changes to
$1.52/pound.
A U.S. firm sells merchandise today to a British company for 150,000 pounds. The current
exchange rate is $1.55/pound, the account is payable in three months, and the firm chooses to
avoid any hedging techniques designed to reduce or eliminate the risk of changes in the
exchange rate. If the exchange rate changes to $1.58/pound the U.S. firm will realize a
___________ of ____________. - ANS✔✔ gain; $4,500
A U.S. firm sells merchandise today to a British company for 150,000 pounds. The current
exchange rate is $1.55/pound, the account is payable in three months, and the firm chooses to
avoid any hedging tecnhiques designed to reduce or eliminate the risk of changes int eh
exchange rate. If the exchange rate changes to $1.52/pound the U.S. firm will realize a
___________ of ___________. - ANS✔✔ loss; $4,500
____________ is NOT a commonly used contractual hedge against foreign exchange transaction
exposure. - ANS✔✔ All of the above: forward market hedge, money market hedge, options
market hedge
A _________ hedge refers to an offsetting operating cash flow such as a payable arising from
the conduct of business - ANS✔✔ natural
As a generalized rule, only realized foreign exchange losses are deductible for tax purposes -
ANS✔✔ True
Hedging, or reducing risk, is the same as adding value or return to the firm - ANS✔✔ False
There is considerable question among investors and managers about whether hedging is a good
and necessary tool - ANS✔✔ True
