FIN 417 EXAM 3 REVISION STUDY
QUESTIONS WITH VERIFIED SOLUTIONS
AND EXPLANATIONS.
1. _____ type of exposure is defined as the extent to which the value of the
firm would be affected by unanticipated changes in exchange rates.
Answer: Economic Exposure
Explanation: Economic exposure (also known as operating exposure)
measures the impact of exchange rate changes on a firm’s future cash flows
and market value, beyond just contractual cash flows.
2. An MNC seeking to reduce transaction exposure with a strategy of
leading and lagging can probably employ the strategy more effectively
with intra-firm payables and receivables than with customers or outside
suppliers.
Answer: True
Explanation: Intra-firm transactions can be more easily adjusted in timing
than transactions with third parties, allowing more flexibility in hedging
through leading (accelerating) or lagging (delaying) payments.
3. Buying a currency option provides
Answer: All of the options
Explanation: Currency options provide the right (not the obligation) to buy or
sell currency at a fixed rate, offer flexibility, and can be used to hedge
contingent exposures effectively.
, 4. Contingent exposure can best be hedged with
Answer: Options
Explanation: Options are ideal for contingent exposures because they allow
protection against unfavorable outcomes while preserving the benefit of
favorable currency movements.
5. Your firm is an Italian importer of British bicycles. You owe £1,000,000
in 12 months. Use a money market hedge to convert this into a euro-
denominated payable.
Answer: €1,244,212.10
Explanation: Money market hedge involves borrowing euros now, converting
to pounds, investing at UK interest rate, so that you have £1M in 12 months.
6. Your firm is a UK exporter due SFr.1,000,000 in 12 months. Convert this
into a pound-denominated receivable using a money market hedge.
Answer: £464,874.41
Explanation: Discount the SFr receivable to present using Swiss interest rate,
convert to GBP at current spot, and invest for one year in GBP.
7. From the perspective of a U.S. firm owning an asset in Britain, the
coefficient "b" in P = a + b × S + e represents:
Answer: Asset exposure
Explanation: "b" measures the sensitivity of the asset value to exchange rate
movements, i.e., asset exposure.
QUESTIONS WITH VERIFIED SOLUTIONS
AND EXPLANATIONS.
1. _____ type of exposure is defined as the extent to which the value of the
firm would be affected by unanticipated changes in exchange rates.
Answer: Economic Exposure
Explanation: Economic exposure (also known as operating exposure)
measures the impact of exchange rate changes on a firm’s future cash flows
and market value, beyond just contractual cash flows.
2. An MNC seeking to reduce transaction exposure with a strategy of
leading and lagging can probably employ the strategy more effectively
with intra-firm payables and receivables than with customers or outside
suppliers.
Answer: True
Explanation: Intra-firm transactions can be more easily adjusted in timing
than transactions with third parties, allowing more flexibility in hedging
through leading (accelerating) or lagging (delaying) payments.
3. Buying a currency option provides
Answer: All of the options
Explanation: Currency options provide the right (not the obligation) to buy or
sell currency at a fixed rate, offer flexibility, and can be used to hedge
contingent exposures effectively.
, 4. Contingent exposure can best be hedged with
Answer: Options
Explanation: Options are ideal for contingent exposures because they allow
protection against unfavorable outcomes while preserving the benefit of
favorable currency movements.
5. Your firm is an Italian importer of British bicycles. You owe £1,000,000
in 12 months. Use a money market hedge to convert this into a euro-
denominated payable.
Answer: €1,244,212.10
Explanation: Money market hedge involves borrowing euros now, converting
to pounds, investing at UK interest rate, so that you have £1M in 12 months.
6. Your firm is a UK exporter due SFr.1,000,000 in 12 months. Convert this
into a pound-denominated receivable using a money market hedge.
Answer: £464,874.41
Explanation: Discount the SFr receivable to present using Swiss interest rate,
convert to GBP at current spot, and invest for one year in GBP.
7. From the perspective of a U.S. firm owning an asset in Britain, the
coefficient "b" in P = a + b × S + e represents:
Answer: Asset exposure
Explanation: "b" measures the sensitivity of the asset value to exchange rate
movements, i.e., asset exposure.
