2.When exchange rates change,

Multiple Choice

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U.S. firms that produce domestically and sell only to domestic customers will be unaffected.

• U.S. firms that produce domestically and sell only to domestic customers can be affected if they compete against imports.
• 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.
• U.S. firms that produce domestically and sell only to domestic customers will be unaffected, and U.S. firms that produce domestically and sell only to domestic customers can be affected if they compete against imports.

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3. Currency risk

Multiple Choice

is the same as currency exposure.

represents random changes in exchange rates.

measure "what the firm has at risk."

is the same as currency exposure and represents random changes in exchange rates.

4. The link between the home currency value of a firm's assets and liabilities and exchange rate fluctuations is

Multiple Choice

asset exposure.

operating exposure.

asset exposure and operating exposure.

none of the options

5. What does it mean to haveredenominatedan asset in terms of the dollar?

Multiple Choice

You have undertaken a hedging strategy that gives the asset a constant dollar value.

Multiply the foreign currency value of the asset by the spot exchange rate.

You have undertaken accounting changes to eliminate translation exposure.

none of the options

The variability of the dollar value of an asset (invested overseas) depends on

Multiple Choice

the variability of the dollar value of the asset that is related to random changes in the exchange rate.

the dollar value variability that is independent of exchange rate movements.

the variability of the dollar value of the asset that is related to random changes in the exchange rate, as well as the dollar value variability that is independent of exchange rate movements.

none of the options

7. With regard tooperational hedgingversusfinancial hedging,

Multiple Choice

operational hedging provides a more stablelong-termapproach than does financial hedging.

financial hedging, when instituted on a rollover basis, is a superior long-term approach to operational hedging.

since they both have the same goal, stabilizing the firm's cash flows in domestic currency, they are fungible in use.

none of the options

8. Which of the following is false?

Multiple Choice

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.

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.

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.

none of the options

9. A firm's operating exposure is

Multiple Choice

defined as the extent to which the firm's operating cash flows would be affected by the random changes in exchange rates.

determined by the structure of the markets in which the firm sources its inputs, such as labor and materials, and sells its products.

determined by the firm's ability to mitigate the effect of exchange rate changes by adjusting its markets, product mix, and sourcing.

all of the options

10. When the domestic currency is strong or expected to become strong,

Multiple Choice

this could erode the competitive position of the firm's exports.

this could erode the competitive position of the firm's import competition.

the firm should consider locating production facilities in a foreign country where costs are low.

this could erode the competitive position of the firm's exports and the firm should consider locating production facilities in a foreign country where costs are low.

11. Translation exposure refers to

Multiple Choice

accounting exposure.

the effect that an unanticipated change in exchange rates will have on the consolidated financial reports of an MNC.

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.

all of the options

12. 12. When exchange rates change, the value of a foreign subsidiary's assets and liabilities that are denominated in a foreign currency change

Multiple Choice

when they are viewed from the perspective of the subsidiary firm.

when they are viewed from the perspective of the parent firm.

but this is only of material concern if the parent firm is liquidating the subsidiary in a bankruptcy and is forced to realize the value of the assets and liabilities at the current exchange rate.

none of the options

13. The sensitivity of "realized" domestic currency values of the firm's contractual cash flowsdenominatedin foreign currency to unexpected changes in the exchange rate is

Multiple Choice

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• transaction exposure.
• translation exposure.
• economic exposure.
• none of the options

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14. The extent to which the value of the firm would be affected by unexpected changes in the exchange rate is

Multiple Choice

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• transaction exposure.
• translation exposure.
• economic exposure.
• none of the options

15. The difference between accounting exposure and translation exposure is that

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• translation is about going from one language to another, accounting is just about the numbers.
• accounting exposure and translation exposure are the same thing.
• hedging one always involves increasing the other.
• hedging one might involve increasing the other.

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16. Which of the following is a translation method where the gain or loss due to translation adjustment does not affect reported cash flows?

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• Current/noncurrent method
• Current rate method
• Current/future method
• Short/long term method

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17. FASB 8

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• required taking foreign exchange gains or losses through the income statement.
• caused reported earnings to fluctuate substantially from year to year.
• ran into acceptance problems from the accounting profession and MNCs.
• all of the options

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18. The stated objectives of FASB 52 are

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• to provide information that is generally compatible with the expected economic effects of a rate change on an enterprise's cash flows and equity.
• to reflect in consolidated statements the financial results and relationships of the individual consolidated entities as measured in their functional currencies in conformity with U.S. generally accepted accounting principles.
• to provide information that is generally compatible with the expected economic effects of a rate change on an enterprise's cash flows and equity, and to reflect in consolidated statements the financial results and relationships of the individual consolidated entities as measured in their functional currencies in conformity with U.S. generally accepted accounting principles.
• none of the options

19. The source of translation exposure

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• is a mismatch of net assets and net liabilities denominated in the same currency.
• is a mismatch of net assets and net liabilities denominated in the different currencies.
• is a mismatch of current assets and current liabilities denominated in different currencies.
• none of the options

20. Under which method does the gain or loss due to translation adjustment not affect reported cash flows, as it does with the other three translation methods?

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Current/noncurrent method

• Monetary/nonmonetary method

Temporal method

Current rate method