tb11 - Kirt C. Butler, Multinational Finance, 3rd edition...

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Kirt C. Butler, Multinational Finance , 3 rd edition Chapter 11 Managing Transaction Exposure to Currency Risk True/False 1. The multinational corporation’s economic exposure to currency risk is made up of transaction exposure and operating exposure. ANS: True. 2. Transaction exposure is defined as change in the value of monetary (contractual) cash flows due to an unexpected change in exchange rates. ANS: True. 3. Transaction exposure to currency risk is defined as change in financial accounting statements arising from unexpected changes in currency values. ANS: False. Transaction exposure is the exposure of monetary assets and liabilities. 4. Every corporate cash flow denominated in a foreign currency has a transaction exposure to currency risk. ANS: True. 5. To avoid influencing divisional hedging decisions, the corporate treasury should charge operating divisions the same price for a currency hedge (such as a forward contract) regardless of when the hedge is executed. ANS: False. Operating divisions should be charged market prices for currency hedges. 6. A benefit of leading and lagging is that it does not distort the returns earned by the various affiliates. ANS: False. This is one of the drawbacks of leading and lagging. 7. Transaction exposure to currency risk is easy to hedge with currency forwards. ANS: True. 8. Currency options are the most popular currency hedge. ANS: False. The currency forward contract is the most popular currency hedging instrument. 9. Currency futures are like currency forwards except that they are marked-to-market daily. ANS: True. 10. A currency call option gives the buyer the right to buy an underlying currency at an exchange rate and on an expiration date that is determined by the option contract. ANS: True. 11. The seller of a currency call option has the obligation to deliver the specified currency at the exercise price. ANS: True. 12. An option premium is paid by the buyer to the seller at the time the option is purchased. ANS: True. 83
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Kirt C. Butler, Multinational Finance , 3 rd edition 13. The option premium compensates the seller for the expected loss should the option be exercised by the buyer. ANS: True. 14. A currency swap is an exchange of one currency for another in the spot market. ANS: False. A currency swap is an agreement to exchange interest payments denominated in two different currencies Multiple Choice 1. The currency risk exposure given the most attention by financial managers is ____. a. economic exposure b. operating exposure c. transaction exposure d. translation exposure e. none of the above ANS: C 2. Geographically diversified operations provide a natural hedge of transaction exposure to currency risk because ____. a.
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This note was uploaded on 12/07/2011 for the course FINS 3616 taught by Professor Curry during the One '10 term at University of New South Wales.

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tb11 - Kirt C. Butler, Multinational Finance, 3rd edition...

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