11.4 Proactive Management of Operating Exposure

11.4 Proactive Management of Operating Exposure

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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) 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 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) Currency swaps are exclusively for periods of time under one year.

15) 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.

16) Most swap dealers arrange swaps so that each firm that is a party to the transaction does not know who the counterparty is.

17) Most swap dealers arrange swaps so that each firm that is a party to the transaction knows who the counterparty is.

18) Swap agreements are treated as off-balance sheet transactions via U.S. accounting methods.

19) Swap agreements are treated as line items on the balance sheet via U.S. accounting methods.

20) After being introduced in the 1980s, currency swaps have remained a relatively insignificant financial derivative instrument.

21) After being introduced in the 1980s, currency swaps have gained increasing importance as financial derivative instruments.

22) Which of the following is NOT one of the commonly employed financial policies used to manage operating and transaction exposure?

A) use of natural hedges by matching currency cash flows

B) back-to-back or parallel loans

C) currency swaps

D) All of the above are commonly used financial policies for managing operating exposure.

23) Contractual approaches (i.e., options and forwards) have occasionally been used to hedge operating exposure, but are costly and possibly ineffectual.

24) Which of the following is NOT a proactive policy for managing operating exposure?

A) matching currency of cash flow

B) back-to-back loans

C) cross currency swap agreements

D) All of the above are proactive management policies for operating exposure.