ECO 410 Week 7 Quiz – Strayer
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Quiz 6 Chapter 11 and 12
Translation Exposure
11.1 Overview of Translation
Multiple Choice
1)
Translation exposure may also be called ________ exposure.
A)
transaction
B)
operating
C)
accounting
D)
currency
2)
________ exposure is the potential for an increase or decrease in the parent
company's net worth and reported net income caused by a change in exchange
rates since the last transaction.
A)
Transaction
B)
Operating
C)
Currency
D)
Translation
3)
Translation exposure measures:
A)
changes in the value of outstanding financial obligations incurred prior to a
change in exchange rates.
B) the
potential for an increase or decrease in the parent company's net worth and
reported net income caused by a change in exchange rates since the last
consolidation of international operations.
C) an
unexpected change in exchange rates impact on short run expected cash flows.
D) none
of the above
4)
According to your authors, the main purpose of translation is:
A) to
prepare consolidated financial statements.
B) to
help management assess the performance of foreign subsidiaries.
C) to
act as an interpreter for managers without foreign language skills.
D) none
of the above
5)
Historical exchange rates may be used for ________, while current exchange
rates may be used for ________.
A) fixed
assets and current assets; income and expense items
B)
equity accounts and fixed assets; current assets and liabilities
C)
current assets and liabilities; equity accounts and fixed assets
D)
equity accounts and current liabilities; current assets and fixed assets
6) If an
imbalance results from the accounting method used for translation, the
imbalance is taken either to ________ or ________.
A) the
bank; the post office
B)
depreciation; the market for foreign exchange swaps
C) current
income; equity reserves
D)
current liabilities; equity reserves
7)
Generally speaking, translation methods by country define the translation
process as a function of what two factors?
A) size;
location
B) a
firm's functional currency; location
C)
location; foreign subsidiary independence
D)
foreign subsidiary independence; a firm's functional currency
8) A/An
________ subsidiary is one in which the firm operates as an extension of the
parent company with cash flows highly interrelated with the parent.
A)
self-sustaining foreign
B)
integrated foreign entity
C)
foreign
D) none
of the above
9)
Consider two different foreign subsidiaries of Georgia-Pacific Wood Products
Inc. The first subsidiary mills trees in Canada and ships its entire product to
the Georgia-Pacific U.S. The second subsidiary is also owned by the parent firm
but is located in Japan and retails tropical hardwood furniture that it buys
from many different sources. The first subsidiary is likely a/an ________
foreign entity with most of its cash flows in U.S. dollars, and the second
subsidiary is more of a/an ________ foreign entity.
A)
domestic; integrated
B)
self-sustaining; domestic
C)
integrated; self-sustaining
D)
self-sustaining; integrated
10) A
foreign subsidiary's ________ currency is the currency used in the firm's
day-to-day operations.
A) local
B)
integrated
C)
notational dollar
D)
functional
11) The
________ determines accounting policy for U.S. firms.
A)
Securities and Exchange Commission (SEC)
B) Federal
Reserve System (Fed)
C)
Financial Accounting Standards Board (FASB)
D)
General Agreement on Tariffs and Trade (GATT)
True/False
1) It is
possible to use different exchange rates for different line items on a
financial statement.
2) If the
same exchange rate were used to remeasure every line on a financial statement,
then there would be no imbalances from remeasuring.
3) A
foreign subsidiary''s functional currency is the currency of the primary
economic environment in which the subsidiary operates and in which it generates
cash flows.
4) It is
highly unusual for a multinational firm to have both integrated foreign
entities AND self-sustaining foreign entities.
11.2 Translation Methods
Multiple Choice
1) The
two basic methods for the translation of foreign subsidiary financial
statements are the ________ method and the ________ method.
A)
current rate; temporal
B)
temporal; proper timing
C)
current rate; future rate
D) none
of the above
2) Gains
or losses caused by translation adjustments when using the current rate method
are reported separately on the:
A)
consolidated statement of cash flow.
B)
consolidated income statement.
C)
consolidated balance sheet.
D) none
of the above
3) The
basic advantage of the ________ method of foreign currency translation is that
foreign nonmonetary assets are carried at their original cost in the parent's
consolidated statement while the most important advantage of the ________
method is that the gain or loss from translation does not pass through the
income statement.
A)
monetary; current rate
B)
temporal; current rate
C)
temporal; monetary
D)
current rate; temporal
4) Under
the U.S. method of translation procedures, if the financial statements of the
foreign subsidiary of a U.S. company are maintained in U.S. dollars:
A)
translation is accomplished through the current rate method.
B)
translation is accomplished through the temporal method.
C)
translation is not required.
D) the
translation method to be used is not obvious.
5) Under
the U.S. method of translation procedures, if the financial statements of the
foreign subsidiary of a U.S. company are maintained in the local currency, and
the local currency is the functional currency, then:
A) the
translation method to be used is not obvious.
B)
translation is accomplished through the temporal method.
C)
translation is not required.
D)
translation is accomplished through the current rate method.
6) Under
the U.S. method of translation procedures, if the financial statements of the
foreign subsidiary of a U.S. company are maintained in the local currency, and
the U.S. dollar is the functional currency, then:
A)
translation is not required.
B)
translation is accomplished through the current rate method.
C)
translation is accomplished through the temporal method.
D) none
of the above
7) If
the European subsidiary of a U.S. firm has net exposed assets of €750,000, and
the euro drops in value from $1.30/euro to $1.20/€ the U.S. firm has a
translation:
A) gain
of $75,000.
B) loss
of $75,000.
C) gain
of $625,000.
D) loss
of €576,923.
8) If
the European subsidiary of a U.S. firm has net exposed assets of €200,000, and
the euro increases in value from $1.22/€ to $1.26/€ the U.S. firm has a
translation:
A) gain
of $8,000.
B) loss
of $8,000.
C) gain
of $252,000.
D) loss
of €252,000.
9) If
the British subsidiary of a European firm has net exposed assets of £125,000,
and the pound increases in value from €1.40/£ to €1.44/£, the European firm has
a translation:
A) gain
of €5,000.
B) loss
of €5,000.
C) gain
of £5,000.
D) loss
of £5,000.
10) If
the British subsidiary of a European firm has net exposed assets of £250,000,
and the pound drops in value from €1.35/£ to €1.30/£, the European firm has a
translation:
A) gain
of €12,500.
B) loss
of €12,500.
C) loss
of £12,500.
D) gain
of £12,500.
True/False
1)
Exchange rate imbalances that are passed through the balance sheet affect a
firm's reported income, but imbalances transferred to the income statement do
not.
2) The
current rate method is the most prevalent method today for the translation of
financial statements.
3) The
temporal rate method is the most prevalent method today for the translation of
financial statements.
4) The
biggest advantage of the current rate method of reporting translation
adjustments is the fact that the gain or loss goes directly to the reserve
account on the consolidated balance sheet and does not pass through the
consolidated income statement.
5) Under
the temporal rate method, specific assets and liabilities are translated at
exchange rates consistent with the timing of the item's creation.
6) The
temporal method of foreign currency translation gains or losses resulting from
remeasurement are carried directly to current consolidated income and thus
introduces volatility to consolidated earnings.
7) : The
current rate method and the temporal method are two basic methods for
translation that are employed worldwide
Essay
1) The
two methods for the translation of foreign subsidiary financial statements are
the current rate and temporal methods. Briefly, describe how each of these
methods translates the foreign subsidiary financial statements into the parent
company's consolidated statements. Identify when each technique should be used
and the major advantage(s) of each.
11.3 U.S. Translation Procedures
Multiple Choice
1) Under
U.S. accounting and translation practices, use of the current rate method is
termed ________ while use of the temporal method is termed ________.
A)
translation; the same
B)
translation; remeasurement
C)
remeasurement; the same
D)
remeasurement; translation
2) Which
of the following primary principles of U.S. translation procedures in NOT true?
A) If
the financial statements of the foreign subsidiary of a U.S. company are
maintained in U.S. dollars, translation is not required.
B) If
the financial statements of the foreign subsidiary are maintained in the local
currency and the local currency is the functional currency, they are translated
by the temporal method.
C) If
the financial statements of the foreign subsidiary are maintained in the local
currency and the U.S. dollar is the functional currency, they are remeasured by
the temporal method.
D) All
of the above are true.
True/False
1) Under
U.S. accounting and translation practices, use of the current rate method is
termed "translation" while use of the temporal method is termed
"remeasurement."
2) If
the financial statements of the foreign subsidiary are maintained in the local
currency and the U.S. dollar is the functional currency, they are remeasured by
the temporal method.
11.4 Trident Corporation's Translation Exposure
Multiple Choice
1)
________ occur as a result of changes in the value of currency, whereas
________ occur as a result of ongoing business activities.
A)
Operating gains or losses; translation gains or losses
B) Swap
losses; translation gains or losses
C)
Translation gains or losses; operating gains or losses
D) all
of the above
True/False
1)
Translation gains or losses can be quite different from operating gains or
losses not only in magnitude but also in sign.
11.5 Trident Corporation's Translation Exposure:
Income
Multiple Choice
1) The
main technique to minimize translation exposure is called a/an ________ hedge.
A)
balance sheet
B)
income statement
C)
forward
D)
translation
2) A
balance sheet hedge requires that the amount of exposed foreign currency assets
and liabilities:
A) have
a 2:1 ratio of assets to liabilities.
B) have
a 2:1 ratio of liabilities to assets.
C) have
a 2:1 ratio of liabilities to equity.
D) be
equal.
3) If a
firm's balance sheet has an equal amount of exposed foreign currency assets and
liabilities and the firm translates by the temporal method, then:
A) the
net exposed position is called monetary balance.
B) the
change is value of liabilities and assets due to a change in exchange rates
will be of equal but opposite direction.
C) Both
A and B are true.
D) none
of the above
4) If a
firm's subsidiary is using the local currency as the functional currency, which
of the following is NOT a circumstance that could justify the use of a balance
sheet hedge?
A) The
foreign subsidiary is about to be liquidated, so that the value of its
Cumulative Translation Adjustment (CTA) would be realized.
B) The
firm has debt covenants or bank agreements that state the firm's debt/equity
ratio will be maintained within specific limits.
C) The
foreign subsidiary is operating is a hyperinflationary environment.
D) All
of the above are appropriate reasons to use a balance sheet hedge.
5) If
the parent firm and all subsidiaries denominate all exposed assets and
liabilities in the parent's reporting currency this will ________ exposure but each
subsidiary would have ________ exposure.
A)
maximize translation; no transaction
B)
eliminate translation; transaction
C)
maximize transaction; no translation
D)
eliminate transaction; translation
6) A
Canadian subsidiary of a U.S. parent firm is instructed to bill an export to
the parent in U.S. dollars. The Canadian subsidiary records the accounts
receivable in Canadian dollars and notes a profit on the sale of goods. Later,
when the U.S. parent pays the subsidiary the contracted U.S. dollar amount, the
Canadian dollar has appreciated 10% against the U.S. dollar. In this example,
the Canadian subsidiary will record a:
A) 10%
foreign exchange loss on the U.S. dollar accounts receivable.
B) 10%
foreign exchange gain on the U.S. dollar accounts receivable.
C) Since
the Canadian firm is a U.S. subsidiary, neither a gain nor loss will be
recorded.
D) Any
gain or loss will be recorded only by the parent firm.
7)
________ gains and losses are "realized" whereas ________ gains and
losses are only "paper."
A)
Translation; transaction
B)
Transaction; translation
C)
Translation; operating
D) none
of the above
True/False
1) It is
possible that efforts to decrease translation exposure may result in an
increase in transaction exposure.
2) One possible
reason for a balance sheet hedge could be because the foreign subsidiary is
about to be liquidated, so that value of its Cumulative Translation Adjustment
(CTA)would be realized.
3) One
possible reason for a balance sheet hedge could be because the firm has debt
covenants or bank agreements that state the firm''s debt/equity ratios will be
maintained within specific limits.
4) If
management expects a foreign currency to depreciate, it could minimize
translation exposure by increasing net exposed assets.
5) If
management anticipates an appreciation of the foreign currency, it should
decrease net exposed assets to benefit from a gain.
Essay
1)
Describe a balance sheet hedge and give at least two examples of when such a
hedge could be justified.
balance sheet hedge attempts to equalize the
amount of assets and liabilities of a foreign subsidiary exposed to translation
risk. Thus, the gain to the firm from a change in exchange rates will be
perfectly offset by an equal and opposite loss. Firms may engage in balance
sheet hedges under conditions of hyperinflation, or when the subsidiary is
about to be liquidated and the value of the CTA account would be realized. The
author on page 16 lists other examples.
Chapter 12 Operating Exposure
12.1 Trident Corporation: A Multinational's
Operating Exposure
Multiple Choice
1)
Another name for operating exposure is ________ exposure.
A)
economic
B)
competitive
C)
strategic
D) all
of the above
2) What
type of international risk exposure measures the change in present 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
3)
________ cash flows arise from intracompany and intercompany receivables and
payments, while ________ cash flows are payments for the use of loans and
equity.
A)
Financing; operating
B)
Operating; financing
C)
Operating; accounting
D)
Accounting; financing
4) Which
of the following is NOT an example of a financial cash flow?
A)
parent invested equity capital
B)
interest on intrafirm lending
C)
payment for goods and services
D)
intrafirm principal payments
5) Which
of the following is NOT an example of an operating cash flow?
A)
management fees and distributed overhead
B)
royalties and license fees
C) rent
and lease payments
D)
dividend paid to parent company
6)
________ 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
7)
Simpson Sign Company based in Frostbite Falls, Minnesota has a 6-month
C$100,000 contract to complete sign work in Winnipeg, Manitoba, Canada. The
current spot rate is $1.02/C$ and the forward rate is $1.01/C$. Under
conditions of equilibrium, management would use ________ today when preparing
operating budgets.
A)
$102,000
B)
$101,000
C)
$100,000
D) none
of the above
8) When
considering the phases of adjustment and response to operating exposure in the
LONG RUN, price changes tend to be ________ and volume changes tend to be ________.
A)
fixed/contracted; contracted.
B)
fixed/contracted; completely flexible.
C)
completely flexible; completely flexible.
D)
completely flexible; contracted.
True/False
1) The
goal of operating exposure analysis is to identify strategic operating
techniques the firm might adopt to enhance value in the face of unanticipated
exchange rate changes.
2)
Operating cash flows may occur in different currencies and at different times,
but financing cash flows may occur only in a single currency.
Comment: Financing of cash flows may also be in
several currencies.
3)
Expected changes in foreign exchange rates should already be factored into
anticipated operating results by management and investors.
4) Moral
hazard may occur when a firm or individual takes on more risk when it knows
that someone else will "pick up the tab."
5) Even
though contracts are often fixed in the short run, as time passes, prices and
costs can be changed to reflect the new competitive realities caused by a change
in exchange rates.
12.2 Measuring Operating Exposure: Trident
Germany
Multiple Choice
1)
Recently the British Pound suffered an unexpected depreciation in value. Which
of the following actions being considered by Coventry Furniture of London, a
purely domestic furniture manufacturer and retailer, would be considered a
highly unlikely response to the depreciation of the pound?
A)
Coventry might choose to maintain its domestic sales prices constant in pound
terms.
B)
Coventry might try to raise domestic prices because competing imports are now
priced higher in England.
C)
Coventry might try to lower domestic prices because competing imports are now
priced higher in England.
D) none
of the above
2)
Recently the Canadian dollar realized an unexpected appreciation in value.
Which of the following actions being considered by Tall Timber Exports, a
Canadian logging firm specializing in exporting raw forest products, would be
considered a highly unlikely response to the appreciation of the Canadian
dollar?
A) Tall
Timber Exports might lower export prices in an effort to maintain market share.
B) Tall
Timber Exports might raise export prices only slightly in an effort to increase
market share.
C) Tall
Timber Exports might leave export prices as they are and wait to determine what
actions to take if any in the future.
D) all
of the above
3) For a
firm that competes internationally to sell its products, a depreciation of its
domestic currency relative to markets where the firm exports goods, should
eventually result in ________ sales at home and ________ sales abroad, other
things equal.
A)
fewer; greater
B)
fewer; fewer
C)
greater; greater
D)
greater; fewer
4)
Brimmo Motorcycles Inc., a U.S.-based firm, manufactures and sells electric
motorcycles both domestically and internationally. A sudden and unexpected
appreciation of the U.S. dollar should allow sales to ________ at home and
________ abroad. (Assume other factors remain unchanged.)
A)
increase; increase
B)
decrease; decrease
C) increase;
decrease
D)
decrease; increase
True/False
1) The
strategy management undertakes in response to unexpected changes in exchange
rates depends to a large measure on their opinion about the price elasticity of
demand.
2)
Unexpected changes in exchange rates is never good news for a firm's operating
income.
12.3 Strategic Management of Operating Exposure
Multiple Choice
1) Which
of the following is NOT an example of diversifying operations?
A)
diversifying sales
B)
diversifying location of operations
C)
raising funds in more than one country
D)
sourcing raw materials in more than one country
2) Which
of the following is NOT an example of diversification in financing?
A)
raising funds in more than one market
B)
raising funds in more than one country
C)
diversifying sales
D) All
of the above qualify.
3) When
disequilibria in international markets occur, management can take advantage by:
A) doing
nothing if they are already diversified and able to realize beneficial
portfolio effects.
B)
recognizing disequilibria faster than purely domestic competitors.
C)
shifting operational of financing activities to take advantage of the
disequilibria.
D) all
of the above
4)
Purely domestic firms will be at a disadvantage to MNEs in the event of market
disequilibria because:
A)
domestic firms lack comparative data from its own sources.
B)
international firms are already so large.
C) all
of the domestic firm's raw materials are imported.
D) None
of the above; domestic firms are not at a disadvantage.
5) Which
of the following is probably NOT an advantage of foreign exchange risk
management?
A) the
reduction of the variability of cash flows due to domestic business cycles
B)
increased availability of capital
C)
reduced cost of capital
D) All
of the above are potential advantages of foreign exchange risk management.
6) Which
of the following is NOT an example of a form of political risk that might be
avoided or reduced by foreign exchange risk management?
A)
expropriation of assets
B) destruction
of raw materials through natural disaster
C) war
D)
unfavorable legal changes
True/False
1)
Management must be able to predict disequilibria in international markets to
take advantage of diversification strategies.
2) If a
firm diversifies its financing sources, it will be pre-positioned to take
advantage of temporary deviations from the International Fisher Effect.
3)
Diversifying the financing base means diversifying sales, location of
production facilities, and raw material sources.
4) The
variability of a firm's operating cash flows is probably reduced by
international diversification of its production, sourcing, and sales because
exchange rate changes under disequilibrium conditions are likely to increase
the firm''s competitiveness in some markets while reducing it in others.
Essay
1)
Diversification is possibly the best technique for reducing the problems
associated with international transactions. Provide one example each of
international financial diversification and international operational
diversification and explain how the action reduces risk.
12.4 Proactive Management of Operating Exposure
Multiple Choice
1) Which
of the following is NOT identified by your authors as a proactive management
technique to reduce exposure to foreign exchange risk?
A)
matching currency cash flows
B)
cross-currency swaps
C)
remaining a purely domestic firm
D)
parallel loans
2) 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 that country.
D)
Increase sales in this country.
3) 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 Federal Reserve Board to enact monetary policy favorable to your
exposure risk.
D) none
of the above
4) The
particular strategy of trying to offset stable inflows of cash from one country
with outflows of cash in the same currency is known as:
A)
hedging.
B)
diversification.
C)
matching.
D)
balancing.
5) Which
of the following is NOT an acceptable hedging technique to reduce risk caused
by a relatively predictable long-term foreign currency inflow of Japanese yen?
A)
Import raw materials from Japan denominated in yen to substitute for domestic
suppliers.
B) Pay
suppliers from other countries in yen.
C)
Import raw materials from Japan denominated in dollars.
D)
Acquire debt denominated in yen.
6) An
MNE has a contract for a relatively predictable long-term inflow of Japanese
yen that the firm chooses to hedge by seeking out potential suppliers in Japan.
This hedging strategy is referred to as:
A) a
natural hedge.
B)
currency-switching.
C)
matching.
D)
diversification.
7) An
MNE has a contract for a relatively predictable long-term inflow of Japanese
yen that the firm chooses to hedge by paying for imports from Canada in
Japanese yen. This hedging strategy is known as:
A) a
natural hedge.
B) currency-switching.
C)
matching.
D)
diversification.
8) 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.
9) A
________ occurs when two business firms in separate countries arrange to borrow
each other's currency for a specified period of time.
A)
natural hedge loan
B)
forward loan
C)
currency switch loan
D)
back-to-back loan
10) A
Canadian firm with a U.S. subsidiary and a U.S. firm with a Canadian subsidiary
agree to a parallel loan agreement. In such an agreement, the Canadian firm is
making a/an ________ loan to the ________ subsidiary while effectively
financing the ________ subsidiary.
A)
indirect; U.S.; Canadian
B)
indirect; Canadian; U.S.
C)
direct; U.S.; Canadian
D)
direct; Canadian; U.S.
11)
Which of the following is NOT an important impediment to widespread use of
parallel loans?
A)
difficulty in finding an appropriate counterparty
B) the
risk that one of the parties will fail to return the borrowed funds when agreed
C) the
process does not avoid exchange rate risk
D) All
of the above are significant impediments.
12) A
________ resembles a back-to-back loan except that it does not appear on a
firm's balance sheet.
A)
forward loan
B)
currency hedge
C)
counterparty
D)
currency swap
13) 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)
back-to-back loan
D) none
of the above
14) A
British firm and a U.S. Corporation each wish to enter into a currency swap
hedging agreement. The British firm is receiving U.S. dollars from sales in the
U.S. but wants pounds. The U.S. firm is receiving pounds from sales in Britain
but wants dollars. Which of the following choices would best satisfy the
desires of the firms?
A) The
British firm pays dollars to a swap dealer and receives pounds from the dealer.
The U.S. firm pays pounds to the swap dealer and receives dollars.
B) The
U.S. firm pays dollars to a swap dealer and receives pounds from the dealer.
The British firm pays pounds to the swap dealer and receives dollars.
C) The
British firm pays pounds to a swap dealer and receives pounds from the dealer.
The U.S. firm pays dollars to the swap dealer and receives dollars.
D) The
British firm pays dollars to a swap dealer and receives dollars from the
dealer. The U.S. firm pays pounds to the swap dealer and receives pounds.
15)
Reinvoicing centers provide the following benefit(s):
A) aid
in the management of foreign exchange exposure.
B)
effectively guarantee the exchange rate for future orders.
C) help
manage intra-subsidiary cash flows.
D) all of
the above
16)
NorthRim Inc. (NRI), imports extreme condition outdoor wear and equipment from
the Allofit Territories Company (ATC) located in Canada. With the steady
decline of the U.S dollar against the Canadian dollar NRI is finding a
continued relationship with ATC to be an increasingly difficult proposition. In
response to NRI's request, ATC has proposed the following risk-sharing
arrangement. First, set the current spot rate as the base rate. As long as spot
rates stay within 5% (up or down) NRI will pay at the base rate. Any rate
outside of the 5% range, ATC will share equally with NRI the difference between
the spot rate and the base rate. If the current spot rate is C$1.20/$, what are
the upper and lower limits for trading to take place at C$1.20?
A)
C$1.205/$ - C$1.195/$
B)
C$1.15/$ - C$1.25/$
C)
C$1.14/$ - C$1.26/$
D) none
of the above
17)
NorthRim Inc. (NRI), imports extreme condition outdoor wear and equipment from
The Allofit Territories Company (ATC) located in Canada. With the steady
decline of the U.S dollar against the Canadian dollar NRI is finding a
continued relationship with ATC to be an increasingly difficult proposition. In
response to NRI's request, ATC has proposed the following risk-sharing
arrangement. First, set the current spot rate as the base rate. As long as spot
rates stay within 5% (up or down) NRI will pay at the base rate. Any rate
outside of the 5% range, ATC will share equally with NRI the difference between
the spot rate and the base rate. If NRI has a payable of C$100,000 due today
and the current spot rate is C$1.17/$, how much does LBC owe in U.S. dollars?
A)
$83,333
B)
$85,470
C)
$85,837
D)
$117,000
18)
Costs associated with the purchase of sizeable put options positions include
each of the following EXCEPT:
A) the
purchase price of the options.
B) the
opportunity cost of buying the options rather than diversifying operations to
reduce risk.
C)
executive salaries of having corporate offices in more than one country.
D) none
of the above
True/False
1)
Currency swaps are exclusively for periods of time under one year.
2) Most
swap dealers arrange swaps so that each firm that is a party to the transaction
does not know who the counterparty is.
3) Most
swap dealers arrange swaps so that each firm that is a party to the transaction
knows who the counterparty is.
4) Swap
agreements are treated as off-balance sheet transactions via U.S. accounting
methods.
5) Swap
agreements are treated as line items on the balance sheet via U.S. accounting
methods.
6) After
being introduced in the 1980s, currency swaps have remained a relatively
insignificant financial derivative instrument.
7) After
being introduced in the 1980s, currency swaps have gained increasing importance
as financial derivative instruments.
8) The
empirical evidence strongly supports the proposition that contractual hedges
can effectively eliminate operating exposure.
Essay
1) A
British firm has a subsidiary in the U.S., and a U.S. firm, known to the
British firm, has a subsidiary in Britain. Define and then provide an example
for each of the following management techniques for reducing the firm's
operating cash flows. The following are techniques to consider:
a) matching currency cash flows
b) risk-sharing agreements
c) back-to-back or parallel loans
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