CHAPTER 2
Question 1: What is exchange rate exposure?
A. The sensitivity of a firm’s cash flows to exchange rate
movements
B. The ability of a company to predict future currency
values
C. The level of foreign investment a company holds
D. The amount of foreign currency a company keeps in
reserves
Question 2: Which of the following is NOT a type of
exchange rate exposure?
A. Transaction exposure
B. Economic exposure
C. Translation exposure
D. Inflation exposure
Question 3: Transaction exposure arises from:
A. The effect of exchange rates on consolidated financial
statements
B. Future payables and receivables denominated in
foreign currencies
C. The long-term competitiveness of a firm
D. Government regulations on currency conversion
Question 4: How can firms reduce transaction
exposure?
A. Engaging in currency speculation
B. Using hedging instruments like forward contracts
C. Avoiding all foreign transactions
D. Keeping all revenue in domestic currency
Question 5: What is the key difference between economic
exposure and transaction exposure?
A. Economic exposure only affects companies with foreign
subsidiaries
B. Economic exposure deals with long-term effects, while
transaction exposure is short-term
C. Transaction exposure affects cash flows, while economic
exposure does not
D. Transaction exposure is not influenced by exchange rates
Question 6: What is translation exposure?
A. The risk that currency fluctuations will affect reported
earnings
B. The risk of losing money when converting currencies
C. The risk of having too much cash in foreign currency
D. The potential for currency manipulation by
governments
Question 7: A U.S. company with a subsidiary in Europe
is most likely to face:
A. No exchange rate exposure
B. High transaction exposure but low translation
exposure
C. High translation exposure if the euro fluctuates
against the dollar
D. No impact from foreign exchange rate changes
Question 8: Economic exposure can be measured using:
A. Regression analysis of cash flows and exchange rate
movements
B. Historical financial statements
C. A company’s annual report
D. Forward contract pricing
Question 9: If the domestic currency appreciates, how
might it affect an exporting firm?
A. It reduces the competitiveness of exports, potentially
lowering sales
B. It increases the demand for the firm's products abroad
C. It has no impact on the firm's international revenue
D. It lowers the cost of foreign production
Question 10: How can an MNC reduce its economic
exposure?
A. By focusing solely on domestic markets
B. By diversifying operations across multiple countries
C. By keeping all foreign earnings in cash reserves
D. By eliminating foreign currency transactions
Question 11: Translation exposure primarily affects:
A. A company’s long-term competitive advantage
B. The reported financial statements of multinational
companies
C. The day-to-day operations of a firm
D. The cost of goods sold
Question 12: Which strategy can help mitigate
translation exposure?
A. Hedging with forward contracts
B. Matching revenues and expenses in the same currency
C. Increasing debt in foreign markets
D. Investing in gold
Question 13: If a U.S. company invoices all its exports in
U.S. dollars, it will still face:
A. Transaction exposure
B. Economic exposure
C. No exposure
D. Translation exposure only
Question 14: What is a major limitation of translation
exposure?
A. It does not affect cash flows directly
B. It leads to higher production costs
C. It can only be measured annually
D. It is unpredictable
Question 15: Which method is used to assess economic
exposure?
A. Scenario analysis
B. Historical exchange rate charts
C. Interest rate parity models
D. Balance sheet review
Question 16: Which factor increases translation
exposure?
A. Greater reliance on domestic sales
B. More subsidiaries operating in foreign markets
C. A fixed exchange rate system
D. Holding all foreign revenue in cash reserves
Question 17: How does currency depreciation affect an
importing firm?
A. It increases the cost of foreign goods
B. It lowers the firm’s expenses
C. It boosts the firm’s competitiveness
D. It has no effect on financial performance
Question 18: Which financial instrument can hedge
transaction exposure?
A. Forward contracts
B. Equity stocks
C. Mutual funds
D. Corporate bonds
Question 19: What causes economic exposure?
A. Unhedged foreign currency transactions
B. Long-term changes in currency values affecting
competitiveness
C. Government intervention in currency markets
D. Short-term fluctuations in exchange rates
Question 20: What is the most comprehensive measure
of currency exposure?
A. Economic exposure
B. Transaction exposure
C. Translation exposure
D. Foreign reserves holdings
Question 21: What is transaction exposure?
A. The sensitivity of a firm's financial statements to
exchange rate changes
B. The impact of long-term currency fluctuations on firm
competitiveness
C. The risk that contractual cash flows denominated in
foreign currency will be affected by exchange rate
changes
D. The possibility of future foreign investment losses
Question 22: Which of the following is NOT a technique
for hedging transaction exposure?
A. Forward contracts
B. Currency options
C. Diversification of production facilities
D. Money market hedges
Question 23: How does a forward contract hedge
transaction exposure?
A. By allowing firms to purchase or sell foreign currency
at a pre-agreed rate in the future
B. By reducing the number of foreign transactions a firm
engages in
C. By allowing firms to invest in multiple currencies
D. By predicting future exchange rate movements
Question 24: Which of the following best describes a
money market hedge for payables?
A. Borrowing in the foreign currency now and investing it
until the payment is due
B. Buying foreign currency on the spot market and
holding it
C. Using forward contracts to hedge against exchange
rate movements
D. Purchasing call options on the foreign currency
Question 25: A put option hedge is most useful when:
A. The firm expects the foreign currency to appreciate
B. The firm has receivables in foreign currency and wants
to protect against depreciation
C. The firm has payables in foreign currency and expects
depreciation
D. The firm wants to speculate on currency movements
Question 26: What is selective hedging?
A. Hedging all foreign currency transactions
B. Hedging only transactions with significant exposure
based on market conditions
C. Avoiding hedging strategies to minimize costs
D. Using futures contracts exclusively for risk
management
Question 27: What is a limitation of hedging transaction
exposure using options?
A. They are not available in all currencies
B. They are riskier than forward contracts
C. They require payment of a premium
D. They cannot be customized to firm-specific needs
Question 28: A company that expects to receive foreign
currency payments should hedge by:
A. Buying forward contracts
B. Selling forward contracts
C. Purchasing call options
D. Borrowing in foreign currency
Question 29: Which of the following is an advantage of
using currency options over forward contracts?
A. Options are always cheaper than forward contracts
B. Options provide flexibility because they do not require
execution if unfavorable
C. Options eliminate all currency risk
D. Options can be used for long-term hedging only
Question 30: What is a key disadvantage of using
forward contracts?
A. They are not legally binding
B. They require payment of a premium
C. They eliminate potential benefits from favorable
exchange rate movements
D. They cannot be used for hedging receivables
Question 31: If a company expects the foreign currency
to depreciate, what hedging strategy should it use for
receivables?
A. Buy a call option
B. Buy a put option
C. Enter a money market hedge
D. Delay the collection of receivables
Question 32: A futures hedge differs from a forward
hedge because:
A. Futures contracts are standardized and traded on
exchanges
B. Forward contracts require an upfront payment
C. Futures contracts can be customized for any amount
and maturity
D. Forward contracts are not legally binding
Question 33: What is an advantage of a money market
hedge?
A. It eliminates all currency risk
B. It does not require financial market participation
C. It provides immediate access to foreign currency
D. It allows firms to take advantage of interest rate
differentials
Question 34: If a company overhedges its transaction
exposure, what happens?
A. It takes on unnecessary risk
B. It benefits from currency appreciation
C. It eliminates all financial risk
D. It ensures maximum protection against exchange rate
fluctuations
Question 35: Leading and lagging is a strategy that:
A. Involves adjusting payment timing to take advantage
of expected currency movements
B. Uses derivatives to hedge currency risk
C. Eliminates exchange rate risk
D. Requires government approval
Question 36: What is cross-hedging?
A. Using a currency with a high correlation to the
exposed currency for hedging
B. Hedging with multiple financial instruments
C. Diversifying foreign currency transactions
D. Using forward contracts exclusively
Question 37: What is a risk of short-term repeated
hedging?
A. It is not allowed in most markets
B. It can become expensive over time
C. It eliminates the need for financial planning
D. It provides permanent protection
Question 38: How does currency diversification reduce
transaction exposure?
A. By spreading risk across multiple currencies
B. By eliminating all currency risk
C. By reducing foreign currency transactions
D. By using derivatives
Question 39: What is the primary goal of managing
transaction exposure?
A. To eliminate all foreign exchange risk
B. To stabilize cash flows and protect profit margins
C. To speculate on currency movements for potential
gains
D. To increase foreign currency reserves
Question 40: When would a company choose NOT to
hedge its transaction exposure?
A. When the cost of hedging is higher than the potential
risk
B. When exchange rates are expected to remain constant
C. When the company is engaged in international trade
for the first time
D. When it only operates in domestic markets
