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Chapter 09
Management of Economic Exposure
Multiple Choice Questions
1. Suppose the U.S. dollar substantially depreciates against the Japanese yen. The change in
exchange rate
A. can have significant economic consequences for U.S. firms.

B. can have significant economic consequences for Japanese firms.
C. can have significant economic consequences for both U.S. and Japanese firms.
D. none of the above
exchange rate
A. will tend to weaken the competitive position of import-competing U.S. car makers.
B. will tend to strengthen the competitive position of import-competing U.S. car makers.
C. will tend to strengthen the competitive position of Japanese car makers at the expense of U.S.
makers.
3. The link between a firm's future operating cash flows and exchange rate fluctuations is
A. asset exposure.
B. operating exposure.
C. both a and b
4. When the Mexican peso collapsed in 1994, declining by 37 percent,
A. U.S. firms that exported to Mexico and priced in peso were adversely affected.
B. U.S. firms that exported to Mexico and priced in dollars were adversely affected.
C. U.S. firms were unaffected by the peso collapse, since Mexico is such a small market.
D. both a and b
9-1
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
5. When exchange rates change,
A. U.S. firms that produce domestically and sell only to domestic customers will be unaffected.
B. U.S. firms that produce domestically and sell only to domestic customers can be affected if
they compete against imports.
C. U.S. firms that produce domestically and sell only to domestic customers will be affected, but
only if they borrow in foreign currency to finance their domestic operations.
D. both a and b
A. this can alter the operating cash flow of a domestic firm.

B. this can alter the competitive position of a domestic firm.
C. this can alter the home currency values of a multinational firm's assets and liabilities.
D. all of the above
7. Two studies found a link between exchange rates and the stock prices of U.S. firms,
A. this suggests that exchange rate changes can systematically affect the value of the firm by
influencing its operating cash flows.
B. this suggests that exchange rate changes can systematically affect the value of the firm by
influencing the domestic currency values of its assets and liabilities.
C. both a and b
8. It is conventional to classify foreign currency exposures into the following types:
A. economic exposure, transaction exposure, and translation exposure.

B. economic exposure, noneconomic exposure, and political exposure.
C. national exposure, international exposure, and trade exposure.
D. conversion exposure, and exchange exposure.
9. Exposure to currency risk can be measured by the sensitivities of
A. the future home currency values of the firm's assets and liabilities.
B. the firm's operating cash flows to random changes in exchange rates.
C. both a and b
9-2
10. Operating exposure measures
A. the extent to which the foreign currency value of the firm's assets is affected by unanticipated
changes in exchange rates.
B. the extent to which the firm's operating cash flows will be affected by unexpected changes in
exchange rates.
C. the affect of changes in exchange rates will have on the consolidated financial reports of a
MNC.
D. the affect of unanticipated changes in exchange rates on the dollar value of contractual
obligations denominated in a foreign currency.
11. Economic exposure refers to
A. the sensitivity of realized domestic currency values of the firm's 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 firm's consolidated financial statement can be affected by changes in
exchange rates.
D. ex post and ex ante currency exposures.
12. Currency risk
A. is the same as currency exposure.

B. represents random changes in exchange rates.
C. measure "what the firm has at risk."
D. both a and b
13. Suppose a U.S.-based MNC maintains a vacation home for employees in the British countryside
and the local price of this property is always moving together with the pound price of the U.S.
dollar. As a result,
A. whenever the pound depreciates against the dollar, the local currency price of this property
goes up by the same proportion.
B. the firm is not exposed to currency risk even if the pound-dollar exchange rate fluctuates
randomly.
C. both a and b
9-3
14.
The exposure coefficient in the regression is given by:
A.
B.
C.
15.
The exposure coefficient in the regression is:
A. A measure of how a change in the exchange rate affects the dollar value of a firm's assets.
B. Has a value of zero if the value of the firm's assets is perfectly correlated with changes in the
exchange rate.
C. both a and b
16.
The exposure coefficient in the regression informs
A. how much of a foreign currency to sell forward.

B. the part of the variability of the dollar value of the asset that is related to random changes in
the exchange rate.
C. captures the residual part of the dollar value variability that is independent of exchange rate
movements.
D. how many call options to write.
9-4
17. Before you can use the hedging strategies such as a forward market hedge, options market
hedge, and so on, you should consider running a regression of the form .
When reviewing the output, you should initially focus on
A. the intercept a.
B. the slope coefficient b.
C. mean square error, MSE.
D. R2.
18. The link between the home currency value of a firm's assets and liabilities and exchange rate
fluctuations is
A. asset exposure.
C. both a and b
19. A purely domestic firm that sources and sells only domestically,
A. faces exchange rate risk to the extent that it has international competitors in the domestic
market.
B. faces no exchange rate risk.
C. should never hedge since this could actually increase its currency exposure.
D. both b and c
20. In recent years, the U.S. dollar has depreciated substantially against most major currencies of the
world, especially against the euro.
A. The stronger euro has made many European products more expensive in dollar terms, hurting
sales of these products in the United States.
B. The stronger euro has made many American products less expensive in euro terms, boosting
sales of U.S. products in Europe.
C. Both a and b
D. None of the above
9-5
21. In recent years,
A. the U.S. dollar has appreciated substantially against most major currencies of the world,
especially against the euro.
B. the U.S. dollar has depreciated substantially against most major currencies of the world,
C. the U.S. dollar has maintained its value against most major currencies of the world, especially
against the euro.
22. From the perspective of the U.S. firm that owns an asset in Britain, the exposure that can be
measured by the coefficient b in regressing the dollar value P of the British asset on the
dollar/pound exchange rate S using the regression equation is
A. asset exposure.
C. accounting exposure.
23. On the basis of regression Equation we can decompose the variability of the
dollar value of the asset, Var(P), into two separate components.
A. Cov(P,S) = b2 × Var(P) + Var(S)

B. Var(P) = b2 × Var(S) + Var(e)
C. Cov(P,S) = b2 × Cov(S,P) + Cov(S,e)
D. Var(P) = b2 × Var(S)
E. None of the above
dollar value of the asset, Var(P), into two separate components Var(P) = b2 × Var(S) + Var(e).
The first term in the right-hand side of the equation, b2 × Var(S) represents.
A. the part of the variability of the dollar value of the asset that is related to random changes in
the exchange rate.
B. captures the residual part of the dollar value variability that is independent of exchange rate
movements.
C. none of the above
9-6
dollar value of the asset, Var(P), into two separate components Var(P) = b2 × Var(S) + Var(e).
The second term in the right-hand side of the equation, Var(e) represents.
A. the part of the variability of the dollar value of the asset that is related to random changes in
the exchange rate.
B. captures the residual part of the dollar value variability that is independent of exchange rate
movements.
26. What does it mean to have redenominated an asset in terms of the dollar?
A. You have undertaken a hedging strategy that gives the asset a constant dollar value.
B. Multiply the foreign currency value of the asset by the spot exchange rate.
C. Undertaken accounting changes to eliminate translation exposure.
27. A firm with a highly elastic demand for its products
A. will be unable to pass increased costs following unfavorable changes in the exchange rate
without significantly lowering the quantity sold.
B. will be able to raise prices following unfavorable changes in the exchange rate without
significantly lowering the quantity sold.
C. can easily pass increased costs on to consumers.
D. will sell about the same amount of product regardless of price.
28. Operating exposure can be defined as
A. the link between the future home currency values of the firm's assets and liabilities and
exchange rate fluctuations.
B. the extent to which the firm's operating cash flows would be affected by random changes in
exchange rates.
C. the sensitivity of realized domestic currency values of the firm's contractual cash flows
D. the potential that the firm's consolidated financial statement can be affected by changes in
exchange rates.
9-7
29. The extent to which the firm's operating cash flows would be affected by random changes in
exchange rates is called
A. asset exposure.
C. both a and b
30. The variability of the dollar value of an asset (invested overseas) depends on
A. the variability of the dollar value of the asset that is related to random changes in the exchange
rate.
B. the dollar value variability that is independent of exchange rate movements.
C. both a and b
31. Consider a U.S. MNC who owns a foreign asset. If the foreign currency value of the asset is
inversely related to changes in the dollar-foreign currency exchange rate,
A. the company has a built-in hedge.

C. both a and b
32. With regard to operational hedging versus financial hedging,
A. operational hedging provides a more stable long-term approach than does financial hedging.
B. financial hedging, when instituted on a rollover basis, is a superior long-term approach to
operational hedging.
C. since they both have the same goal, stabilizing the firm's cash flows in domestic currency, they
are fungible in use.
9-8
33. Which of the following are identified by your text as a strategy for managing operating exposure:
1) Selecting low-cost production sites

2) Flexible sourcing policy
3) Diversification of the market
4) Product differentiation and R&D efforts
5) Financial Hedging
A. 1), 3), and 5) only

B. 2) and 4) only
C. 1), 4), and 5) only
D. 1), 2), 3), 4), and 5)
A U.S. firm holds an asset in Great Britain and faces the following scenario:
where,
P* = Pound sterling price of the asset held by the U.S. firm

P = Dollar price of the same asset
34. The expected value of the investment in U.S. dollars is
A. $4,950.
B. $3,700.
C. $2,112.50.
35. The variance of the exchange rate is:
A. 0.0200
B. 0.10
C. 0.002
9-9
36. The "exposure" (i.e. the regression coefficient beta) is:
A. -25,000
B. 2,5000
C. -2,500
37. Which of the following conclusions are correct?
A. Most of the volatility of the dollar value of the British asset can be removed by hedging
exchange risk because b2[Var(S)] and Var(e) are 236,717 ($)2 and 493,751 ($)2 respectively.
B. Most of the volatility of the dollar value of the British asset cannot be removed by hedging
C. Most of the volatility of the dollar value of the British asset cannot be removed by hedging
exchange risk because b2[Var(S)] and Var(e) are 125,000 ($)2 and -127,500 ($)2 respectively.
D. Most of the volatility of the dollar value of the British asset can be removed by hedging
38. Which of the following would be an effective hedge?
A. Sell £2,500 forward at the 1-year forward rate, F1($/£), that prevails at time zero.
B. Buy £2,500 forward at the 1-year forward rate, F1($/£), that prevails at time zero.
C. Sell £25,000 forward at the 1-year forward rate, F1($/£), that prevails at time zero.
where,

9-10
39. The expected value of the investment in U.S. dollars is:
A. $5,050
B. $3,700
C. $2,112.50
A. 0.0200
B. 0.10
C. 0.002
A. 7,500
B. 2,5000
C. -2,500
exchange risk because b2[Var(S)] and Var(e) are 1,125,000 ($)2 and 2,500 ($)2 respectively.
9-11
where,

A. $5,050
B. $4,500
C. $2,112.50
A. 0.0200
B. 0.101875
C. 0.002
9-12
A. 7,500
B. 2,5000
C. -2,500
exchange risk because b2[Var(S)] and Var(e) are 0 ($)2 and 0 ($)2 respectively.
B. None of the volatility of the dollar value of the British asset can be removed by hedging
A. Sell £2,278.13 forward at the 1-year forward rate, F1($/£), that prevails at time zero.
A U.S. firm holds an asset in Israel and faces the following scenario:
where,
P* = Israeli shekel (IS) price of the asset held by the U.S. firm
9-13
A. $2,083.33
B. $762.50
C. $6,250.00
D. $6,562.50
A. 0.001968
B. 0.002969
C. 0.003968
D. 0.004968
A. -52.6316
B. 1,289.80
C. 12,898.00
A. Most of the volatility of the dollar value of the Israeli asset can be removed by hedging
B. Most of the volatility of the dollar value of the Israeli asset cannot be removed by hedging
C. Most of the volatility of the dollar value of the Israeli asset cannot be removed by hedging
exchange risk because b2[Var(S)] and Var(e) are 8.22 ($)2 and 59,211 ($)2, respectively.
D. Most of the volatility of the dollar value of the Israeli asset can be removed by hedging
exchange risk because b2[Var(S)] and Var(e) are 8.22 ($)2 and 59,211 ($)2 respectively.
9-14
A. Sell 53 Israeli shekels forward at the 1-year forward rate, F1($/IS), that prevails at time zero.
B. Buy 53 Israeli shekels forward at the 1-year forward rate, F1($/IS), that prevails at time zero.
C. Sell 12,898 Israeli shekels forward at the 1-year forward rate, F1($/IS), that prevails at time
zero.
9-15
54. Find an effective hedge financial hedge if a U.S. firm holds an asset in Great Britain and faces the
following scenario:

The CFO runs a regression of the form
The regression coefficient beta is calculated as
Where
The variance of the exchange rate is calculated as:

E(S) = 0.25 × $2.20 + 0.50 × $2.00 + 0.25 × $1.80 = $.55 + $1 + $.45 = $2.00
VAR(S) = 0.25($2.20 - $2.00)2 + 0.50($2.00 - $2.00)2 + 0.25($1.80 - $2.00)2 = 0.01 + 0 + 0.01

= 0.02
The expected value of the investment in U.S. dollars is:
E[P] = 0.25 × $6,600 + 0.50 × $5,000 + 0.25 × $3,600 = $5,050
Which of the following is the most effective hedge financial hedge?
D. 0.25 × £3,000 + 0.50 × £2,500 + 0.25 × £2,000 = £2,500
9-16
55. Suppose that you implement your hedge from the last question at F1($/£) = $2/£. Your cash flows
in state 1, 2, and 3 respectively will be
A. $5,100, $5,000, $5,100.

B. $5,100, $5,100, $5,100.
C. $5,000, $5,000, $5,000.
56. A U.S. firm holds an asset in Great Britain and faces the following scenario:
Where

The CFO decides to hedge his exposure by selling forward the expected value of the pound
denominated cash flow at F1($/£) = $2/£. As a result
A. The firm's exposure to the exchange rate is made worse.

B. He has a nearly perfect hedge.
C. He has a perfect hedge.
57. A U.S. firm holds an asset in Italy and faces the following scenario:
Where
P* = Euro price of the asset held by the U.S. firm

The CFO decides to hedge his exposure by selling forward the expected value of the euro
denominated cash flow at F1($/£) = $1.50/€. As a result
A. the firm's exposure to the exchange rate is made worse.

B. he has a nearly perfect hedge.
C. he has a perfect hedge.
9-17
58. Suppose a U.S. firm has an asset in Britain whose local currency price is random. For simplicity,
suppose there are only three states of the world and each state is equally likely to occur. The
future local currency price of this British asset (P*) as well as the future exchange rate (S) will be
determined, depending on the realized state of the world.
Which of the following statements is most correct?
A. The firm faces no exchange rate risk since the local currency price of the asset and the
exchange rate are negatively correlated.
B. The firm faces substantial exchange rate risk since the local currency price of the asset and
the exchange rate are positively correlated.
C. The firm's exchange rate exposure can be completely hedged with derivatives written on the
British pound.
D. Since randomness is involved, no hedging is possible.
British pound.
9-18
British pound.
61. Suppose a U.S. firm has an asset in Italy whose local currency price is random. For simplicity,
future local currency price of this asset (P*) as well as the future exchange rate (S) will be
Assume that you choose to "hedge" this asset by selling forward the expected value of the euro
denominated cash flow at F1($/£) = $1.50/€. Calculate your cash flows in each of the possible
states.
A. $1,400, $1,400, $1,400

B. $1,496.6, $1,400, $1,306.40
C. $1,404, $1,404. $1,404
9-19
62. Consider a U.S.-based MNC with a wholly-owned Italian subsidiary. Following a depreciation of
the dollar against the euro, which of the following conclusions are correct?
A. The cash flow in euro could be altered due an alteration in the firm's competitive position in the
marketplace.
B. A given operating cash flow in euro will be converted to a higher U.S. dollar cash flow.
C. Both a and b
63. Consider a U.S.-based MNC with a wholly-owned Italian subsidiary. Following a depreciation of
the dollar against the euro, which of the following describes the competitive effect of the
depreciation?
A. The cash flow in euro could be altered due an alteration in the firm's competitive position in the
marketplace.
B. A given operating cash flow in euro will be translated to a higher U.S. dollar cash flow.
C. Both a and b
64. Consider a U.S. MNC with operations in Great Britain. Which of the following are potential risks
following a strengthening of the dollar?
A. A pound sterling depreciation may affect operating cash flow in pounds by altering the firm's
competitive position in the marketplace.
B. A given operating cash flow in pounds will be converted into a lower dollar amount after the
pound depreciation.
C. Both a and b
65. Which of the following is false?
A. The competitive effect is that a depreciation may affect operating cash flow in the foreign
currency by altering the firm's competitive position in the marketplace.
B. The conversion effect is defined as a given operating cash flow in a foreign currency will be
converted into a lower dollar amount after a currency depreciation.
C. The competitive effect is defined as a given operating cash flow in a foreign currency will be
9-20
66. Consider a U.S.-based MNC with a wholly-owned German subsidiary. Following a depreciation of
the dollar against the euro, which of the following describes the conversion effect of the
depreciation?
A. The cash flow in euro could be altered due a change in the firm's competitive position in the
marketplace.
C. Both a and b
67. Consider a U.S.-based MNC with a wholly-owned French subsidiary. Following a depreciation of
the dollar against the euro, which of the following best describes the mechanism of any effect of
the depreciation?
A. The change in the cash flow in euro due an alteration in the firm's competitive position in the
marketplace is in part a function of the elasticity of demand for the firm's product.
B. A given operating cash flow in euro will be translated to a higher U.S. dollar cash flow
regardless of the firm's hedging program.
C. Both a and b
68. Which of the following is true?
A. The competitive effect is that a currency depreciation may affect operating cash flow in the
foreign currency by altering the firm's competitive position in the marketplace.
B. The conversion effect is defined as a given accounting cash value in a foreign currency will be
converted into a lower dollar amount after currency depreciation.
C. The competitive effect is defined as a given operating cash flow in a foreign currency will be
69. Consider a U.S.-based MNC with a wholly-owned European subsidiary selling a product sourced
in euro and priced in euro with inelastic demand. Following a depreciation of the dollar against the
euro, which of the following is the most true?
A. Since they have inelastic demand, the U.S. firm can just pass through the impact of the
exchange rate change.
B. Since they have elastic demand, the U.S. firm cannot just pass through the impact of the
C. Since the exchange rate movement was favorable to the U.S. firm, there is no impact on the
firm's position.
D. None of the above.
9-21
70. A firm's operating exposure is
A. defined as the extent to which the firm's operating cash flows would be affected by the random
changes in exchange rates.
B. determined by the structure of the markets in which the firm sources its inputs, such as labor
and materials, and sells its products.
C. determined by the firm's ability to mitigate the effect of exchange rate changes by adjusting its
markets, product mix, and sourcing.
D. all of the above
71. Generally speaking, a firm is subject to high degrees of operating exposure
A. when its costs are sensitive to exchange rate changes.

B. when its prices are sensitive to exchange rate changes.
C. when either its cost or its price is sensitive to exchange rate changes.
72. Generally speaking, when both a firm's costs and its price is sensitive to exchange rate changes
A. the firm is not subject to high degrees of operating exposure.

B. the firm is subject to high degrees of operating exposure.
C. the firm should hedge.
73. The firm may not be subject to high degrees of operating exposure
A. when changes in real exchange rates are exactly offset by the inflation differential.
B. when changes in nominal exchange rates are exactly matched by the inflation differential.
C. when changes in nominal exchange rates are exactly offset by the inflation differential.
74. The firm may not be able to pass through changes in the exchange rate
A. in markets with low product differentiation.

B. in markets with high price elasticities.
C. both a and b
9-22
A. in markets with mainly domestics (foreign to the firm) competitors.

B. in markets with low price elasticities.
C. both a and b
76. Generally speaking, a firm is subject to high degrees of operating exposure when
A. either its cost or its price is sensitive to exchange rate changes.

B. both the cost and the price are sensitive to exchange rate changes.
C. both the cost and the price are insensitive to exchange rate changes.
77. What is the objective of managing operating exposure?
A. Stabilize cash flows in the face of fluctuating exchange rates.

B. Selecting low cost production sites.
C. Increase the variability of cash flows in the face of fluctuating exchange rates.
D. Both a and c
A. Stabilize accounting results in the face of fluctuating exchange rates.

79. Managing operating exposure
A. is a short-term tactical issue.

B. is a long-term issue, like selecting a site for a factory.
C. is relatively unimportant, since most MNCs have a built-in hedge.
9-23
80. Which of the following can a company use to manage operating exposure?
A. Selecting low-cost production sites, diversifying the market.

B. Low cost production sites, but not financial hedging.
C. Pursuing a flexible sourcing policy, product differentiation, R&D efforts.
D. Both a and c.
81. When the domestic currency is strong or expected to become strong,
A. this could erode the competitive position of the firm's exports.

B. this could erode the competitive position of the firm's import competition.
C. the firm should consider locating production facilities in a foreign country where costs are low.
D. both a and c
82. A foreign country could provide low cost production sites
A. because the factors of production are underpriced.

B. because the currency is undervalued.
C. because the locals like to give away their land labor and capital to foreigners.
D. both a and b
83. While maintaining multiple production sites does provide a firm valuable options,
A. a firm may miss out on economies of scope.

B. a firm may miss out on economies of scale.
C. a firm may find that exchange rate changes can fully offset the advantage of multiple
manufacturing sites.
D. both a and b
84. Goldman Sachs estimates that as much as __% of the pretax profits that Porsche reported for a
recent fiscal year came from skillfully executing currency options.
A. 5
B. 10
C. 15
D. 75
9-24
85. Developing multiple production sites in a variety of countries,
A. can create an excess capacity problem.

B. can lead to underutilization of domestic plants.
C. can lead to domestic job losses.
D. all of the above
86. A flexible sourcing policy
A. is primarily concerned with low-cost (and often low-quality) vendors.

B. need not be confined just to materials and parts.
C. only works for manufacturing firms, not service firms.
D. puts the focus on the exchange rate at the expense of shipping rates.
87. A firm that is committed to keeping manufacturing facilities in only the home country (and not
developing multiple production sites in a variety of countries) can
A. not mitigate the effects of exchange rate changes.

B. lessen the effect of exchange rate changes by sourcing from where input costs are low.
C. focus on selling commodity products with product differentiation.
D. pursue a strategy of increasing its products price elasticity of demand.
88. If the domestic currency is strong or expected to become strong,
A. a firm can choose to locate production facilities in a foreign country where costs are low due to
either the undervalued currency or underpriced factors of production.
B. a firm should curtail R&D efforts until the exchange rate situation improves.
C. a firm should abandon international sales and focus on domestic market share.
D. the firm should focus on profiting in the currency futures market based on its forecasts.
89. Which of the following is a true statement?
A. As long as exchange rates do not always move in the same direction, the firm can stabilize its
operating cash flows by diversifying its export market.
B. The firm should not get into new lines of business solely to diversify exchange risk because
conglomerate expansion can bring about inefficiency and losses.
C. All of the above are true
D. None of the above is true
9-25
A. lessen the effect of exchange rate changes by pursuing a strategy of diversifying the markets
in which the firm's products are sold.
B. not mitigate the effects of exchange rate changes.
C. lessen the effect of exchange rate changes by pursuing a strategy of selling commodity
products without product differentiation.
91. It can be argued that, while financial hedging can be used to stabilize a firm's cash flows,
A. it is not a substitute for long-term operational hedging.

B. it is therefore a substitute for long-term operational hedging.
C. it is inferior to money market hedging.
D. none of the above.
92. Investments in R&D
A. are usually a waste of time and money.

B. can allow the firm to maintain and strengthen its competitive position.
C. can allow the firm to cut costs and enhance productivity.
D. both b and c
93. The price elasticity of demand for unique products tends to be
A. highly elastic.
B. highly inelastic.
C. both a and b
94. The price elasticity of demand for commodity products tends to be
A. highly elastic.
C. both a and b
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95. In the figure at right, label curves A and B respectively,
A. unhedged, hedged.
B. hedged, unhedged.
C. normal, abnormal.
96. Investment in R&D activities can allow the firm to maintain and strengthen its competitive position
in the face of adverse exchange rate movements. The mechanism for this includes
A. successful R&D efforts allow the firm to cut costs and enhance productivity.
B. R&D efforts can lead to the introduction of new and unique products for which competitors
offer no close substitutes—since the demand for unique products tends to be highly inelastic
the firm would be less exposed to exchange risk.
C. successful R&D efforts can create a perception among consumers that its product is indeed
different from those offered by competitors. Once the firm's product acquires a unique identity,
its demand is less likely to be price-sensitive.
D. all of the above
97. If the stock market of a foreign country is consistently up when the dollar value of the currency is
down,
A. there may not be a great deal of exchange rate risk for a U.S.-based investor.
B. there will be a great deal of exchange rate risk for a U.S.-based investor.
C. then investors can ignore diversification.
9-27
Short Answer Questions
Suppose that you hold a piece of land in the city of London that you may want to sell in one year.
As a U.S. resident, you are concerned with the dollar value of the land. Assume that if the British
economy booms in the future, the land will be worth £2,000, and one British pound will be worth
$1.80. If the British economy slows down, on the other hand, the land will be worth less, say,
£1,500, but the pound will be stronger, say, $2.20/£. You feel that the British economy will
experience a boom with a 60 percent probability and a slowdown with a 40 percent probability.
98. Estimate your exposure (b) to the exchange risk.
99. Compute the variance of the dollar value of your property that is attributable to exchange rate
uncertainty.
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100.Discuss how you can hedge your exchange risk exposure and also examine the consequences
of hedging.
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Chapter 09 Management of Economic Exposure Answer Key
Multiple Choice Questions
exchange rate
A. can have significant economic consequences for U.S. firms.

B. can have significant economic consequences for Japanese firms.
C. can have significant economic consequences for both U.S. and Japanese firms.
Topic: How to Measure Economic Exposure
exchange rate
A. will tend to weaken the competitive position of import-competing U.S. car makers.
B. will tend to strengthen the competitive position of import-competing U.S. car makers.
C. will tend to strengthen the competitive position of Japanese car makers at the expense of
U.S. makers.
3. The link between a firm's future operating cash flows and exchange rate fluctuations is
A. asset exposure.
C. both a and b
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4. When the Mexican peso collapsed in 1994, declining by 37 percent,
A. U.S. firms that exported to Mexico and priced in peso were adversely affected.
B. U.S. firms that exported to Mexico and priced in dollars were adversely affected.
C. U.S. firms were unaffected by the peso collapse, since Mexico is such a small market.
D. both a and b
A. U.S. firms that produce domestically and sell only to domestic customers will be
unaffected.
B. U.S. firms that produce domestically and sell only to domestic customers can be affected if
they compete against imports.
C. U.S. firms that produce domestically and sell only to domestic customers will be affected,
but only if they borrow in foreign currency to finance their domestic operations.
D. both a and b
A. this can alter the operating cash flow of a domestic firm.

B. this can alter the competitive position of a domestic firm.
C. this can alter the home currency values of a multinational firm's assets and liabilities.
D. all of the above
7. Two studies found a link between exchange rates and the stock prices of U.S. firms,
A. this suggests that exchange rate changes can systematically affect the value of the firm by
influencing its operating cash flows.
B. this suggests that exchange rate changes can systematically affect the value of the firm by
influencing the domestic currency values of its assets and liabilities.
C. both a and b
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8. It is conventional to classify foreign currency exposures into the following types:
A. economic exposure, transaction exposure, and translation exposure.

B. economic exposure, noneconomic exposure, and political exposure.
C. national exposure, international exposure, and trade exposure.
D. conversion exposure, and exchange exposure.
9. Exposure to currency risk can be measured by the sensitivities of
A. the future home currency values of the firm's assets and liabilities.
B. the firm's operating cash flows to random changes in exchange rates.
C. both a and b
10. Operating exposure measures
A. the extent to which the foreign currency value of the firm's assets is affected by
unanticipated changes in exchange rates.
B. the extent to which the firm's operating cash flows will be affected by unexpected changes
in exchange rates.
C. the affect of changes in exchange rates will have on the consolidated financial reports of a
MNC.
D. the affect of unanticipated changes in exchange rates on the dollar value of contractual
obligations denominated in a foreign currency.
11. Economic exposure refers to
A. the sensitivity of realized domestic currency values of the firm's contractual cash flows
B. the extent to which the value of the firm would be affected by unanticipated changes in
exchange rate.
C. the potential that the firm's consolidated financial statement can be affected by changes in
exchange rates.
D. ex post and ex ante currency exposures.
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12. Currency risk
A. is the same as currency exposure.

B. represents random changes in exchange rates.
C. measure "what the firm has at risk."
D. both a and b
13. Suppose a U.S.-based MNC maintains a vacation home for employees in the British
countryside and the local price of this property is always moving together with the pound price
of the U.S. dollar. As a result,
A. whenever the pound depreciates against the dollar, the local currency price of this property
goes up by the same proportion.
B. the firm is not exposed to currency risk even if the pound-dollar exchange rate fluctuates
randomly.
C. both a and b
14.
The exposure coefficient in the regression is given by:
A.
B.
C.
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15.
The exposure coefficient in the regression is:
A. A measure of how a change in the exchange rate affects the dollar value of a firm's assets.
B. Has a value of zero if the value of the firm's assets is perfectly correlated with changes in
the exchange rate.
C. both a and b
16.
The exposure coefficient in the regression informs
A. how much of a foreign currency to sell forward.

B. the part of the variability of the dollar value of the asset that is related to random changes
in the exchange rate.
C. captures the residual part of the dollar value variability that is independent of exchange
rate movements.
D. how many call options to write.
17. Before you can use the hedging strategies such as a forward market hedge, options market
hedge, and so on, you should consider running a regression of the form .
When reviewing the output, you should initially focus on
A. the intercept a.
B. the slope coefficient b.
C. mean square error, MSE.
D. R2.
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18. The link between the home currency value of a firm's assets and liabilities and exchange rate
fluctuations is
A. asset exposure.
C. both a and b
19. A purely domestic firm that sources and sells only domestically,
A. faces exchange rate risk to the extent that it has international competitors in the domestic
market.
B. faces no exchange rate risk.
C. should never hedge since this could actually increase its currency exposure.
D. both b and c
20. In recent years, the U.S. dollar has depreciated substantially against most major currencies of
the world, especially against the euro.
A. The stronger euro has made many European products more expensive in dollar terms,
hurting sales of these products in the United States.
B. The stronger euro has made many American products less expensive in euro terms,
boosting sales of U.S. products in Europe.
C. Both a and b
21. In recent years,
A. the U.S. dollar has appreciated substantially against most major currencies of the world,
B. the U.S. dollar has depreciated substantially against most major currencies of the world,
C. the U.S. dollar has maintained its value against most major currencies of the world,
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22. From the perspective of the U.S. firm that owns an asset in Britain, the exposure that can be
measured by the coefficient b in regressing the dollar value P of the British asset on the
dollar/pound exchange rate S using the regression equation is
A. asset exposure.
C. accounting exposure.
23. On the basis of regression Equation we can decompose the variability of

the dollar value of the asset, Var(P), into two separate components.
A. Cov(P,S) = b2 × Var(P) + Var(S)

B. Var(P) = b2 × Var(S) + Var(e)
C. Cov(P,S) = b2 × Cov(S,P) + Cov(S,e)
D. Var(P) = b2 × Var(S)
E. None of the above

the dollar value of the asset, Var(P), into two separate components Var(P) = b2 × Var(S) +
Var(e).
The first term in the right-hand side of the equation, b2 × Var(S) represents.
A. the part of the variability of the dollar value of the asset that is related to random changes
B. captures the residual part of the dollar value variability that is independent of exchange
rate movements.
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the dollar value of the asset, Var(P), into two separate components Var(P) = b2 × Var(S) +
Var(e).
The second term in the right-hand side of the equation, Var(e) represents.
A. the part of the variability of the dollar value of the asset that is related to random changes
B. captures the residual part of the dollar value variability that is independent of exchange
rate movements.
26. What does it mean to have redenominated an asset in terms of the dollar?
A. You have undertaken a hedging strategy that gives the asset a constant dollar value.
B. Multiply the foreign currency value of the asset by the spot exchange rate.
C. Undertaken accounting changes to eliminate translation exposure.
27. A firm with a highly elastic demand for its products
A. will be unable to pass increased costs following unfavorable changes in the exchange rate
without significantly lowering the quantity sold.
B. will be able to raise prices following unfavorable changes in the exchange rate without
significantly lowering the quantity sold.
C. can easily pass increased costs on to consumers.
D. will sell about the same amount of product regardless of price.
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28. Operating exposure can be defined as
A. the link between the future home currency values of the firm's assets and liabilities and
exchange rate fluctuations.
B. the extent to which the firm's operating cash flows would be affected by random changes in
exchange rates.
C. the sensitivity of realized domestic currency values of the firm's contractual cash flows
D. the potential that the firm's consolidated financial statement can be affected by changes in
exchange rates.
Topic: Operating Exposure: Definition
29. The extent to which the firm's operating cash flows would be affected by random changes in
exchange rates is called
A. asset exposure.
C. both a and b
30. The variability of the dollar value of an asset (invested overseas) depends on
A. the variability of the dollar value of the asset that is related to random changes in the
exchange rate.
C. both a and b
31. Consider a U.S. MNC who owns a foreign asset. If the foreign currency value of the asset is
inversely related to changes in the dollar-foreign currency exchange rate,
A. the company has a built-in hedge.

C. both a and b
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32. With regard to operational hedging versus financial hedging,
A. operational hedging provides a more stable long-term approach than does financial
hedging.
B. financial hedging, when instituted on a rollover basis, is a superior long-term approach to
operational hedging.
C. since they both have the same goal, stabilizing the firm's cash flows in domestic currency,
they are fungible in use.
33. Which of the following are identified by your text as a strategy for managing operating
exposure:
1) Selecting low-cost production sites

2) Flexible sourcing policy
3) Diversification of the market
4) Product differentiation and R&D efforts
5) Financial Hedging
A. 1), 3), and 5) only

B. 2) and 4) only
C. 1), 4), and 5) only
D. 1), 2), 3), 4), and 5)
where,

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34. The expected value of the investment in U.S. dollars is
A. $4,950.
B. $3,700.
C. $2,112.50.
A. 0.0200
B. 0.10
C. 0.002
A. -25,000
B. 2,5000
C. -2,500
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exchange risk because b2[Var(S)] and Var(e) are 236,717 ($)2 and 493,751 ($)2
respectively.
respectively.
exchange risk because b2[Var(S)] and Var(e) are 125,000 ($)2 and -127,500 ($)2
respectively.
respectively.
where,

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A. $5,050
B. $3,700
C. $2,112.50
A. 0.0200
B. 0.10
C. 0.002
A. 7,500
B. 2,5000
C. -2,500
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exchange risk because b2[Var(S)] and Var(e) are 1,125,000 ($)2 and 2,500 ($)2
respectively.
respectively.
respectively.
respectively.
where,

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A. $5,050
B. $4,500
C. $2,112.50
A. 0.0200
B. 0.101875
C. 0.002
A. 7,500
B. 2,5000
C. -2,500
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B. None of the volatility of the dollar value of the British asset can be removed by hedging
respectively.
respectively.
A. Sell £2,278.13 forward at the 1-year forward rate, F1($/£), that prevails at time zero.
A U.S. firm holds an asset in Israel and faces the following scenario:
where,
P* = Israeli shekel (IS) price of the asset held by the U.S. firm
A. $2,083.33
B. $762.50
C. $6,250.00
D. $6,562.50
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A. 0.001968
B. 0.002969
C. 0.003968
D. 0.004968
A. -52.6316
B. 1,289.80
C. 12,898.00
A. Most of the volatility of the dollar value of the Israeli asset can be removed by hedging
respectively.
B. Most of the volatility of the dollar value of the Israeli asset cannot be removed by hedging
respectively.
C. Most of the volatility of the dollar value of the Israeli asset cannot be removed by hedging
exchange risk because b2[Var(S)] and Var(e) are 8.22 ($)2 and 59,211 ($)2, respectively.
D. Most of the volatility of the dollar value of the Israeli asset can be removed by hedging
exchange risk because b2[Var(S)] and Var(e) are 8.22 ($)2 and 59,211 ($)2 respectively.
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A. Sell 53 Israeli shekels forward at the 1-year forward rate, F1($/IS), that prevails at time
zero.
B. Buy 53 Israeli shekels forward at the 1-year forward rate, F1($/IS), that prevails at time
zero.
C. Sell 12,898 Israeli shekels forward at the 1-year forward rate, F1($/IS), that prevails at time
zero.
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54. Find an effective hedge financial hedge if a U.S. firm holds an asset in Great Britain and faces
the following scenario:

The CFO runs a regression of the form
The regression coefficient beta is calculated as
Where
The variance of the exchange rate is calculated as:

E(S) = 0.25 × $2.20 + 0.50 × $2.00 + 0.25 × $1.80 = $.55 + $1 + $.45 = $2.00
VAR(S) = 0.25($2.20 - $2.00)2 + 0.50($2.00 - $2.00)2 + 0.25($1.80 - $2.00)2 = 0.01 + 0 + 0.01

= 0.02
The expected value of the investment in U.S. dollars is:
E[P] = 0.25 × $6,600 + 0.50 × $5,000 + 0.25 × $3,600 = $5,050
Which of the following is the most effective hedge financial hedge?
D. 0.25 × £3,000 + 0.50 × £2,500 + 0.25 × £2,000 = £2,500
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55. Suppose that you implement your hedge from the last question at F1($/£) = $2/£. Your cash
flows in state 1, 2, and 3 respectively will be
A. $5,100, $5,000, $5,100.

B. $5,100, $5,100, $5,100.
C. $5,000, $5,000, $5,000.
56. A U.S. firm holds an asset in Great Britain and faces the following scenario:
Where

The CFO decides to hedge his exposure by selling forward the expected value of the pound
denominated cash flow at F1($/£) = $2/£. As a result
A. The firm's exposure to the exchange rate is made worse.

B. He has a nearly perfect hedge.
C. He has a perfect hedge.
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57. A U.S. firm holds an asset in Italy and faces the following scenario:
Where
P* = Euro price of the asset held by the U.S. firm

The CFO decides to hedge his exposure by selling forward the expected value of the euro
denominated cash flow at F1($/£) = $1.50/€. As a result
A. the firm's exposure to the exchange rate is made worse.

B. he has a nearly perfect hedge.
C. he has a perfect hedge.
58. Suppose a U.S. firm has an asset in Britain whose local currency price is random. For
simplicity, suppose there are only three states of the world and each state is equally likely to
occur. The future local currency price of this British asset (P*) as well as the future exchange
rate (S) will be determined, depending on the realized state of the world.
B. The firm faces substantial exchange rate risk since the local currency price of the asset
and the exchange rate are positively correlated.
C. The firm's exchange rate exposure can be completely hedged with derivatives written on
the British pound.
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the British pound.
the British pound.
9-51
61. Suppose a U.S. firm has an asset in Italy whose local currency price is random. For simplicity,
future local currency price of this asset (P*) as well as the future exchange rate (S) will be
Assume that you choose to "hedge" this asset by selling forward the expected value of the
euro denominated cash flow at F1($/£) = $1.50/€. Calculate your cash flows in each of the
possible states.
A. $1,400, $1,400, $1,400

B. $1,496.6, $1,400, $1,306.40
C. $1,404, $1,404. $1,404
62. Consider a U.S.-based MNC with a wholly-owned Italian subsidiary. Following a depreciation
of the dollar against the euro, which of the following conclusions are correct?
A. The cash flow in euro could be altered due an alteration in the firm's competitive position in
the marketplace.
B. A given operating cash flow in euro will be converted to a higher U.S. dollar cash flow.
C. Both a and b
Topic: Illustration of Operating Exposure
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63. Consider a U.S.-based MNC with a wholly-owned Italian subsidiary. Following a depreciation
of the dollar against the euro, which of the following describes the competitive effect of the
depreciation?
A. The cash flow in euro could be altered due an alteration in the firm's competitive position in
the marketplace.
C. Both a and b
64. Consider a U.S. MNC with operations in Great Britain. Which of the following are potential
risks following a strengthening of the dollar?
A. A pound sterling depreciation may affect operating cash flow in pounds by altering the
firm's competitive position in the marketplace.
B. A given operating cash flow in pounds will be converted into a lower dollar amount after the
pound depreciation.
C. Both a and b
65. Which of the following is false?
A. The competitive effect is that a depreciation may affect operating cash flow in the foreign
currency by altering the firm's competitive position in the marketplace.
B. The conversion effect is defined as a given operating cash flow in a foreign currency will be
C. The competitive effect is defined as a given operating cash flow in a foreign currency will
be converted into a lower dollar amount after a currency depreciation.
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66. Consider a U.S.-based MNC with a wholly-owned German subsidiary. Following a
depreciation of the dollar against the euro, which of the following describes the conversion
effect of the depreciation?
A. The cash flow in euro could be altered due a change in the firm's competitive position in
the marketplace.
C. Both a and b
67. Consider a U.S.-based MNC with a wholly-owned French subsidiary. Following a depreciation
of the dollar against the euro, which of the following best describes the mechanism of any
effect of the depreciation?
A. The change in the cash flow in euro due an alteration in the firm's competitive position in
the marketplace is in part a function of the elasticity of demand for the firm's product.
B. A given operating cash flow in euro will be translated to a higher U.S. dollar cash flow
regardless of the firm's hedging program.
C. Both a and b
68. Which of the following is true?
A. The competitive effect is that a currency depreciation may affect operating cash flow in the
foreign currency by altering the firm's competitive position in the marketplace.
B. The conversion effect is defined as a given accounting cash value in a foreign currency will
be converted into a lower dollar amount after currency depreciation.
C. The competitive effect is defined as a given operating cash flow in a foreign currency will
be converted into a lower dollar amount after a currency depreciation.
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69. Consider a U.S.-based MNC with a wholly-owned European subsidiary selling a product
sourced in euro and priced in euro with inelastic demand. Following a depreciation of the
dollar against the euro, which of the following is the most true?
A. Since they have inelastic demand, the U.S. firm can just pass through the impact of the
B. Since they have elastic demand, the U.S. firm cannot just pass through the impact of the
C. Since the exchange rate movement was favorable to the U.S. firm, there is no impact on
the firm's position.
D. None of the above.
Topic: Determinants of Operating Exposure
70. A firm's operating exposure is
A. defined as the extent to which the firm's operating cash flows would be affected by the
random changes in exchange rates.
B. determined by the structure of the markets in which the firm sources its inputs, such as
labor and materials, and sells its products.
C. determined by the firm's ability to mitigate the effect of exchange rate changes by adjusting
its markets, product mix, and sourcing.
D. all of the above
71. Generally speaking, a firm is subject to high degrees of operating exposure
A. when its costs are sensitive to exchange rate changes.

B. when its prices are sensitive to exchange rate changes.
C. when either its cost or its price is sensitive to exchange rate changes.
72. Generally speaking, when both a firm's costs and its price is sensitive to exchange rate
changes
A. the firm is not subject to high degrees of operating exposure.

B. the firm is subject to high degrees of operating exposure.
C. the firm should hedge.
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73. The firm may not be subject to high degrees of operating exposure
A. when changes in real exchange rates are exactly offset by the inflation differential.
B. when changes in nominal exchange rates are exactly matched by the inflation differential.
C. when changes in nominal exchange rates are exactly offset by the inflation differential.
A. in markets with low product differentiation.

B. in markets with high price elasticities.
C. both a and b
A. in markets with mainly domestics (foreign to the firm) competitors.

B. in markets with low price elasticities.
C. both a and b
76. Generally speaking, a firm is subject to high degrees of operating exposure when
A. either its cost or its price is sensitive to exchange rate changes.

B. both the cost and the price are sensitive to exchange rate changes.
C. both the cost and the price are insensitive to exchange rate changes.
Topic: Managing Operating Exposure
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A. Stabilize cash flows in the face of fluctuating exchange rates.

D. Both a and c
A. Stabilize accounting results in the face of fluctuating exchange rates.

79. Managing operating exposure
A. is a short-term tactical issue.

B. is a long-term issue, like selecting a site for a factory.
C. is relatively unimportant, since most MNCs have a built-in hedge.
80. Which of the following can a company use to manage operating exposure?
A. Selecting low-cost production sites, diversifying the market.

B. Low cost production sites, but not financial hedging.
C. Pursuing a flexible sourcing policy, product differentiation, R&D efforts.
D. Both a and c.
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81. When the domestic currency is strong or expected to become strong,
A. this could erode the competitive position of the firm's exports.

B. this could erode the competitive position of the firm's import competition.
C. the firm should consider locating production facilities in a foreign country where costs are
low.
D. both a and c
Topic: Selecting Low-Cost Production Sites
82. A foreign country could provide low cost production sites
A. because the factors of production are underpriced.

B. because the currency is undervalued.
C. because the locals like to give away their land labor and capital to foreigners.
D. both a and b
83. While maintaining multiple production sites does provide a firm valuable options,
A. a firm may miss out on economies of scope.

B. a firm may miss out on economies of scale.
C. a firm may find that exchange rate changes can fully offset the advantage of multiple
manufacturing sites.
D. both a and b
84. Goldman Sachs estimates that as much as __% of the pretax profits that Porsche reported for
a recent fiscal year came from skillfully executing currency options.
A. 5
B. 10
C. 15
D. 75
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85. Developing multiple production sites in a variety of countries,
A. can create an excess capacity problem.

B. can lead to underutilization of domestic plants.
C. can lead to domestic job losses.
D. all of the above
86. A flexible sourcing policy
A. is primarily concerned with low-cost (and often low-quality) vendors.

B. need not be confined just to materials and parts.
C. only works for manufacturing firms, not service firms.
D. puts the focus on the exchange rate at the expense of shipping rates.
Topic: Flexible Sourcing Policy
A. not mitigate the effects of exchange rate changes.

B. lessen the effect of exchange rate changes by sourcing from where input costs are low.
C. focus on selling commodity products with product differentiation.
88. If the domestic currency is strong or expected to become strong,
A. a firm can choose to locate production facilities in a foreign country where costs are low
due to either the undervalued currency or underpriced factors of production.
B. a firm should curtail R&D efforts until the exchange rate situation improves.
C. a firm should abandon international sales and focus on domestic market share.
D. the firm should focus on profiting in the currency futures market based on its forecasts.
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89. Which of the following is a true statement?
A. As long as exchange rates do not always move in the same direction, the firm can stabilize
its operating cash flows by diversifying its export market.
B. The firm should not get into new lines of business solely to diversify exchange risk because
conglomerate expansion can bring about inefficiency and losses.
C. All of the above are true
D. None of the above is true
Topic: Diversification of the Market
A. lessen the effect of exchange rate changes by pursuing a strategy of diversifying the
markets in which the firm's products are sold.
B. not mitigate the effects of exchange rate changes.
C. lessen the effect of exchange rate changes by pursuing a strategy of selling commodity
products without product differentiation.
Topic: Diversification of the Market
91. It can be argued that, while financial hedging can be used to stabilize a firm's cash flows,
A. it is not a substitute for long-term operational hedging.

B. it is therefore a substitute for long-term operational hedging.
C. it is inferior to money market hedging.
D. none of the above.
Topic: Financial Hedging

Topic: R&D Efforts and Product Differentiation
92. Investments in R&D
A. are usually a waste of time and money.

B. can allow the firm to maintain and strengthen its competitive position.
C. can allow the firm to cut costs and enhance productivity.
D. both b and c

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93. The price elasticity of demand for unique products tends to be
A. highly elastic.
C. both a and b

94. The price elasticity of demand for commodity products tends to be
A. highly elastic.
C. both a and b

95. In the figure at right, label curves A and B respectively,
A. unhedged, hedged.
B. hedged, unhedged.
C. normal, abnormal.

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96. Investment in R&D activities can allow the firm to maintain and strengthen its competitive
position in the face of adverse exchange rate movements. The mechanism for this includes
A. successful R&D efforts allow the firm to cut costs and enhance productivity.
B. R&D efforts can lead to the introduction of new and unique products for which competitors
offer no close substitutes—since the demand for unique products tends to be highly
inelastic the firm would be less exposed to exchange risk.
C. successful R&D efforts can create a perception among consumers that its product is
indeed different from those offered by competitors. Once the firm's product acquires a
unique identity, its demand is less likely to be price-sensitive.
D. all of the above

97. If the stock market of a foreign country is consistently up when the dollar value of the currency
is down,
A. there may not be a great deal of exchange rate risk for a U.S.-based investor.
B. there will be a great deal of exchange rate risk for a U.S.-based investor.
C. then investors can ignore diversification.

Short Answer Questions
Suppose that you hold a piece of land in the city of London that you may want to sell in one
year. As a U.S. resident, you are concerned with the dollar value of the land. Assume that if
the British economy booms in the future, the land will be worth £2,000, and one British pound
will be worth $1.80. If the British economy slows down, on the other hand, the land will be
worth less, say, £1,500, but the pound will be stronger, say, $2.20/£. You feel that the British
economy will experience a boom with a 60 percent probability and a slowdown with a 40
percent probability.
9-62
98. Estimate your exposure (b) to the exchange risk.
99. Compute the variance of the dollar value of your property that is attributable to exchange rate
uncertainty.
9-63
International Financial Management Eun 7th Edition Test Bank
100. Discuss how you can hedge your exchange risk exposure and also examine the
consequences of hedging.
9-64
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lost, 66, 67, 68, 80, 123, 254 n., 256, 264, 344, 345.
See also, Ships lost during Interregnum.
sailing qualities of, 61, 185-187, 205, 252, 257, 259, 338.
soldiers on board, 26, 41, 56, 134, 214, 314.
various forms of, 57-60, 126, 256, 257, 338.
wooden, life of, 110.
Shipwrights, 72, 73, 146, 151, 211, 230, 298, 340 and n., 366,
369.
foreign, 59.
master, 15, 73, 74, 113, 151, 152, 162, 163, 186, 203, 204,
208, 209, 257, 266, 267, 268, 298, 340, 365,366, 395,
396.
blunders of, 186, 203, 257-259, 340.
contracts with, 162, 163, 340, 395, 396.
Shipwrights’ Company, 187, 258.
Shot, 33, 57, 97, 158, 159, 160, 213, 289, 341, 361, 367, 371,
380.
Shrewsbury, John Talbot, Earl of, 27.
Shurly, John, 81.
Signalling, 62, 63, 213, 214.
Slings, 54, 96, 155 and n.
Slingsby, Sir Guildford, 189, 196, 282.
Sir Robert, 326 n.
Smalhithe, building at, 14, 35 n., 51 n.
Smith, Thomas, 286, 288, 347 and n., 348 n.
Smyth, John, 73.
Somerhuche, 15 and n.
Somerset, John Beaufort, Earl of, 65 n.
Soper, William, 12, 13, 14, 16, 18, 22, 24, 31.
Southampton, William Fitzwilliam, Earl of, 52, 61, 66.
Sovereign, 35, 36, 39, 40, 42, 49, 55, 57, 61, 68, 72, 77, 127.
Sovereign of the Seas, 247, 252 n., 255, 260-262, 268 n., 338.
Spain, Navy of, 37, 43, 46 and n., 116 and n., 349.
peace with, 185.
Speedwell, 202, 203, 214, 251 n.
Speke, Sir John, 25.
Spert, Sir Thomas, 84 and n., 91.
Stapylton, Miles, 26.
Station lists (Fleets), 342.
(Ships), 80, 214, 262.
Mediterranean, 303.
North American, 303, 336 n.
Stodynges, 373 and n.
Stone guns, 54, 379, 380.
Storehouses, 15, 22, 23, 40, 71, 364.
keepers of, 71, 83, 84.
Stores, prices of, 98, 181, 182, 301, 371.
purchase of, 33, 181.
quantities of, in hand, 71, 181, 211, 299, 363.
sale of, 22, 23, 97.
Stourton, John, Lord, 27.
Stow, John, referred to, 13, 36.
Straits, The, 343 n.
Stryks, 80 and n.
Stubbs, Bishop, referred to, 8, 21 n.
Suffolk, Duke of, see Pole, William de la.
Summer-castle, 15.
Swallow, (of Henry VIII), 51, 55, 59.
(of Mary), 110.
(of Charles I), 259, 261 n., 264.
Sweepstake (of Henry VII), 41, 58.
Symonson, Marcus, 33.
T
Tampons, 97.
Taverner, John, 19, 37.
Thefts, 107, 146, 158, 166, 167, 191, 192, 193, 194, 211, 213,
283-286, 290, 291, 316, 324, 325, 353, 354, 358, 359, 366.
Thompson, Robert, 326, 347 and n., 348 n.
Thoreton, Leonard, 84.
Thorne, Robert, 38.
William, 38.
Tickets for wages, 228, 287, 359.
Tiger (of Henry VIII), 51, 58, 60, 130.
(of Elizabeth), 120, 123, 130.
Tonnage, measurement of, 8, 20, 30, 132, 208, 260, 266-268.
Spanish, 53 n., 132, 133.
proportion of men to, 74.
Ton-tight, 8 and n.
Top-armours, 60.
Trade, coast, 3, 167.
decline of, 199, 200, 272.
effects of Reformation on, 91, 92.
growth of, 3, 10, 11, 18, 34, 42, 90, 91, 167-170, 273, 343.
Trade’s Increase, 201.
Trade to Africa, 11, 91, 176.
to America, 91, 92.
to Baltic, 11, 42, 169, 200.
to East Indies, 91, 170, 200 and n., 271 and n.
to France, 3, 11, 171, 176, 272.
to Iceland, 11, 89.
to Low Countries, 43, 176.
to Mediterranean, 11, 34, 42, 91, 169, 170, 176, 200, 273.
to Spain, 170, 272.
Trading Companies, 108, 169, 174, 182, 272.
Treasurer by sea, 83.
Treaties, commercial, 34, 42, 108.
Trevilian, Sir William, 77.
Trevor, Sir John, 149, 189, 192.
Trin, 80 and n.
Trinity Corporation, 92, 148, 167, 258, 260, 264, 268, 273.
fund, 243.
Trinity Royal 12, 13, 15, 23.
Triumph (of Elizabeth), 120, 122, 128, 155, 156, 157, 206.
(of James I), 202, 208, 259, 328 and n.
Tunnage and poundage, 10 and n., 17, 34.
Tweedy, Roger, 288, 347 n.
U
Unicorn (of Henry VIII), 50, 58, 59, 101, 109.
(of Charles I), 237, 254, 257, 258.
Upnor, chain at, 151, 211, 299, 367.
fort at, 150, 156, 211, 213.
V
Vane, Sir Henry (the elder), 279 n.
(the younger), 240, 281, 295 and n.
Vere, John de. See Oxford, Earl of.
Sir Robert, 27.
Victory (of Elizabeth), 119, 120, 122, 123, 129, 155, 156, 157 n.,
158, 206, 207.
(of James I), 202, 208, 259.
Victualling agreement, conditions of, 140, 141, 324.
buildings, 140, 141, 144, 325.
Commissioners of, 324 n., 326.
department, 103, 113, 136, 140-144, 189, 222, 233, 324-
328, 368.
during Civil war, 308.
frauds in, 81, 107, 143, 146, 194, 227, 236, 237, 325.
rate, 25, 26, 34, 41, 73, 81, 82, 140-144, 190, 238, 324 and
n.
Surveyors of, 103, 140,142, 144, 222, 236, 238; see also
Victualling, Commissioners of.
under Henry VIII, 81-83.
Mary, 112.
Victuals, badness of, 77, 81, 82, 137, 138, 142, 143, 220, 223,
236, 237, 326, 327, 384.
daily allowance of, 82, 140, 238.
special kind of, 134.
stowage of, 82, 144.
want of, 82, 136, 142, 143, 228, 229, 235, 236, 320, 327,
328.
Villiers, George, Duke of Buckingham, 194, 199, 207, 215, 223,
224, 227, 231, 233, 234, 252, 253 n., 267, 270, 280 and n.
Voyages of discovery, 43, 91, 94.
W
Wager, George, 352.
Wages. See Seamen, pay of; Officers, pay of.
Waistcloths, 182 and n., 257.
Wapping, 362.
Warspite, 121, 129, 130, 156, 263.
Warwick, Richard Neville, Earl of, 27, 28, 31, 32, 65 n.
Robert Rich, Earl of, 240, 249, 250, 288, 346.
Watchword, 64.
Water, Edmund, 85.
Watermen, 177 n., 244.
Watts, Sir John, 224, 228, 231.
Waymouth, George, 186, 203.
Wells, John, 230, 260 and n., 266 n., 267, 282.
Weston, Richard, Lord, 234, 235, 279 n.
Whelps, the ten, 256, 344.
White, Philip, 274 n., 367.
Thomas, 349.
White Bear, 120, 122, 129, 130, 131, 263.
William I, 1.
Willoughby, Francis, 326, 347 and n., 349, 365.
Wiltshire, James Butler, Earl of, 27.
Winchester House, 210.
Windebank, Sir Francis, 246, 279 n.
Winter cruising, 111.
Wolstenholme, Sir John, 195 n., 246, 349.
Woodhouse, Sir William, 85, 86, 104.
Worcester, John Tiptoft, Earl of, 27, 31.
Wyard, Robert, 328.
Wyndham, Sir Thomas, 76, 83.
Wynter, George, 149.
John, 85, 93, 94.
Sir William, 102, 104, 107, 108, 111, 149, 156, 160, 393.
Y
Yards, 208.
York, Duke of, see James, Duke of York.
ERRATA
Page 12, line 8, for ‘Sopor,’ read ‘Soper.’
” 19, ” 7, for ‘Tavener,’ read ‘Taverner.’
” 39, ” 36, for ‘1495-6,’ read ‘1495-7.’
” 39, ” 38, for ‘April and July of the latter year,’ read
‘April of the latter year and July 1497.’
” 41, ” 41, for ‘1496,’ read ‘1497.’
” 57, side note, for ‘galliasses,’ read ‘galleasses.’
” 65, line 38, for ‘the victor of Flodden,’ read ‘son of the
victor of Flodden.’
” 135, ” 6, delete quotation mark after ‘forms.’
” 138, ” 23, for ‘price,’ read ‘prices.’
” 152, ” 30, for ‘1557,’ read ‘1587.’
” 155, ” 28, for ‘Triumph,’ read ‘Triumph.’
Transcriber’s Note: The errata have been corrected.

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Management of Economic Exposure

Multiple Choice Questions

A. can have significant economic consequences for U.S. firms.

4. When the Mexican peso collapsed in 1994, declining by 37 percent,

6. When exchange rates change,

A. this can alter the operating cash flow of a domestic firm.

8. It is conventional to classify foreign currency exposures into the following types:

A. economic exposure, transaction exposure, and translation exposure.

9. Exposure to currency risk can be measured by the sensitivities of

11. Economic exposure refers to

12. Currency risk

A. is the same as currency exposure.

The exposure coefficient in the regression is:

The exposure coefficient in the regression informs

A. how much of a foreign currency to sell forward.

A. Cov(P,S) = b2 × Var(P) + Var(S)

27. A firm with a highly elastic demand for its products

28. Operating exposure can be defined as

A. the company has a built-in hedge.

32. With regard to operational hedging versus financial hedging,

1) Selecting low-cost production sites

A. 1), 3), and 5) only

P* = Pound sterling price of the asset held by the U.S. firm

34. The expected value of the investment in U.S. dollars is

35. The variance of the exchange rate is:

37. Which of the following conclusions are correct?

38. Which of the following would be an effective hedge?

P* = Pound sterling price of the asset held by the U.S. firm

40. The variance of the exchange rate is:

41. The "exposure" (i.e. the regression coefficient beta) is:

42. Which of the following conclusions are correct?

P* = Pound sterling price of the asset held by the U.S. firm

44. The expected value of the investment in U.S. dollars is:

45. The variance of the exchange rate is:

47. Which of the following conclusions are correct?

48. Which of the following would be an effective hedge?

50. The variance of the exchange rate is:

51. The "exposure" (i.e. the regression coefficient beta) is:

52. Which of the following conclusions are correct?

P* = Pound sterling price of the asset held by the U.S. firm

The regression coefficient beta is calculated as

The variance of the exchange rate is calculated as:

VAR(S) = 0.25($2.20 - $2.00)2 + 0.50($2.00 - $2.00)2 + 0.25($1.80 - $2.00)2 = 0.01 + 0 + 0.01

Which of the following is the most effective hedge financial hedge?

A. $5,100, $5,000, $5,100.

P* = Pound sterling price of the asset held by the U.S. firm

A. The firm's exposure to the exchange rate is made worse.

P* = Euro price of the asset held by the U.S. firm

A. the firm's exposure to the exchange rate is made worse.

Which of the following statements is most correct?