Chapter 13

1. Transaction exposure is defined as:

a) the sensitivity of realized domestic currency values of the firms contractual cash flows
denominated in foreign currencies to unexpected exchange rate changes
b) the extent to which the value of the firm would be affected by unanticipated changes in
exchange rate
c) the potential that the firms consolidated financial statement can be affected by changes in
exchange rates
d) ex post and ex ante currency exposures
2. The most direct and popular way of hedging transaction exposure is by:
a) exchange-traded futures options
b) currency forward contracts
c) foreign currency warrants
d) borrowing and lending in the domestic and foreign money markets

USE THE FOLLOWING INFORMATION TO ANSWER QUESTIONS 3 AND 4

Suppose that Boeing Corporation exported a Boeing 747 to British Airways and billed 10
million payable in one year. The money market interest rates and foreign exchange rates are
given as follows:

The U.S. interest rate: 6.10% per annum

The U.K. interest rate: 9.00% per annum
The spot exchange rate: $1.50/
The forward exchange rate: $1.46/ (1-year maturity)

3. Assume that Boeing sells a currency forward contract of 10 million for delivery in
one year, in exchange for a given amount of U.S. dollar. Which of the following is all
true? On the maturity date of the contract Boeing will
(i)- have to deliver 10 million to the bank (the counterparty of the contract)
(ii)- take delivery of $14.6 million
(iii)- have a zero net pound exposure
(iv)- have a profit, or a loss, depending on the future changes in the exchange rate,
from this British sale
a) (i) and (iv)
b) (ii and (iv)
c) (ii), (iii), (iv)
d) (i), (ii), (iii)

4. Suppose that on the maturity date of the forward contract, the spot rate turns out to
be $1.40/ (i.e. less than the forward rate of $1.46/). Which of the following is true?
a) Boeing would have received $14.0 million, rather than $14.6 million, had it not entered
into the forward contract
b) Boeing gained $0.6 million from forward hedging
c) a and b
d) none of the above

5. Buying a currency options provides:

a) a flexible hedge against exchange exposure
b) limits the downside risk while preserving the upside potential
c) a right, but not an obligation, to buy or sell a currency
d) all of the above
Chapter 14

1. Translation exposure refers to:

a) accounting exposure
b) the effect that an unanticipated change in exchange rates will have on the consolidated
financial reports of an MNC
c) the change in the value of a foreign subsidiaries assets and liabilities denominated in a
foreign currency, as a result of exchange rate change fluctuations, when viewed from the
perspective of the parent firm
d) all of the above
2. The recognized methods for consolidating the financial reports of an MNC are:
a) short/long term method, current/future method, flexible/inflexible method, and
economic/noneconomic method
b) current/noncurrent method, monetary/nonmonetary method, short/long term method, and
current/future method
c) current/noncurrent method, monetary/nonmonetary method, temporal method, and current
rate method
d) temporal method, current rate method, flexible/inflexible method, and
economic/noneconomic method