NR 447 TEST 3 REVIEW QUESTIONS AND ANSWERS

NR 447 TEST 3 REVIEW QUESTIONS AND ANSWERSIf an MNC has a net inflow in one currency and a net outflow of about the same amount in another currency, then the MNCs' transaction exposure is ____ if the two currencies are ____ correlated. a. high; positively b. low; negatively c. high; negatively d. none of the above c. high; negatively The exposure of a firm's financial statements to exchange rate movements is referred to as a. forward exposure. b. transaction exposure. c. economic exposure. d. translation exposure. d. translation exposure. When the U.S. dollar strengthens against other currencies, a. an MNC's U.S. sales will probably decrease. b. an MNC's exports denominated in U.S. dollars will probably increase. c. an MNC's interest owed on foreign funds borrowed will probably increase. d. an MNC's exports denominated in foreign currencies will probably increase. e. all of the above a. an MNC's U.S. sales will probably decrease. Cerra Co. expects to receive 5 million euros tomorrow as a result of selling goods to the Netherlands. Cerra estimates the standard deviation of daily percentage changes of the euro to be 1 percent over the last 100 days. Assume that these percentage changes are normally distributed. Use the value-at-risk (VaR) method based on a 95 percent confidence level. What is the maximum one-day loss in dollars if the expected percentage change of the euro tomorrow is 0.5 percent? The current spot rate of the euro (before considering the maximum one-day loss) is $1.01. a. -$75,750 b. -$111,100 c. -$57,500 d. -$25,250 c. -$57,500 One argument for the irrelevance of exchange rate risk is that: a. MNCs are not normally subject to economic exposure. b. MNCs are not normally subject to transaction exposure. c. MNCs can easily hedge their economic exposure. d. individuals can invest in a diversified set of MNCs, and can take positions in currencies on their own to offset any exchange rate exposure of MNCs. d. individuals can invest in a diversified set of MNCs, and can take positions in currencies on their own to offset any exchange rate exposure of MNCs. ____ exposure is the degree to which the value of contractual transactions can be affected by exchange rate fluctuations. a. Transaction b. Economic c. Translation d. None of the above a. Transaction Generally, MNCs with more foreign costs than foreign revenues will be ____ affected by a ____ foreign currency. a. favorably; weaker b. not; stronger c. favorably; stronger d. not; weaker a. favorably; weaker Dubas Co. is a U.S.-based MNC that has a subsidiary in Germany and another subsidiary in Austria. Both subsidiaries frequently remit their earnings back to the parent company. The German subsidiary generated a net outflow of €2,000,000 this year, while the Austrian subsidiary generated a net inflow of €1,500,000. What is the net inflow or outflow as measured in U.S. dollars this year? The exchange rate for the euro is $1.05. a. $3,675,000 outflow b. $525,000 inflow c. $525,000 outflow d. $210,000 outflow b. $525,000 outflow Which of the following is not true regarding economic exposure? a. Even purely domestic firms can be affected by economic exposure. b. The impact of a change in the local currency on inflow and outflow variables can sometimes be indirect and therefore different from what is expected. c. In general, depreciation of the firm's local currency causes a decrease in both cash inflows and outflows. d. The degree of economic exposure will likely be much greater for a firm involved in international business than for a purely domestic firm. In general, depreciation of the firm's local currency causes a decrease in both cash inflows and outflows. Cerra Co. expects to receive 5 million euros tomorrow as a result of selling goods to the Netherlands. Cerra estimates the standard deviation of daily percentage changes of the euro to be 1 percent over the last 100 days. Assume that these percentage changes are normally distributed. Use the value-at-risk (VaR) method based on a 95 percent confidence level. What is the maximum one-day percentage loss if the expected percentage change of the euro tomorrow is 0.5 percent? a. -2.2 percent b. -0.5 percent c. -1.15 percent d. -1.5 percent c. -1.15 percent Assume