Part1 Answer the following multimple choice question No explanation is needed. Only choose the correct answer. 1 mark each. Total Mark 3

1. Which of the following statements is NOT true?

1 point

1. PPP does not necessarily hold, and therefore the exchange rate will not necessarily change in accordance with the inflation differential between the two countries
2. Investors in MNCs can easily hedge exchange rate risk on their own
3. Translation exposure is the exposure of an MNCs consolidated financial statements to exchange rate movement
4. The greater the percentage of an MNCs business conducted by its foreign subsidiaries, the larger the percentage of a given financial statement item that is susceptible to translation exposure.

2. A U.S. resident just sold shares in a British firm that had a 20% return (in pounds) during a period when the pound depreciated 5%, his dollar return is :

1 point

1. 26%
2. 20%
3. 14%
4. 15%

3. TNK ltd. is a UK-based MNC with net cash inflows of euros and net cash inflows of Swiss francs. These two currencies are highly (positively) correlated in their movements against the British pound. YSN ltd. is a UK-based MNC that has the same level of net cash flows in these currencies as TNK ltd. except that its euros represent net cash outflows. Which firm has a higher exposure to exchange rate risk?

1 point

1. YSN ltd.
2. TNK ltd.
3. the firms have about the same level of exposure
4. neither firm has any exposure