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CHAPTER 9 Management of Economic Exposure
How to Measure Economic Exposure
International Finance in Practice: U.S. Firms Feel the Pain of Peso’s Plunge Operating Exposure: Definition Illustration of Operating Exposure Determinants of Operating Exposure Managing Operating Exposure
Selecting Low-Cost Production Sites
International Finance in Practice: The Strong Yen and Toyota’s Choice
Flexible Sourcing Policy Diversification of the Market
R&D Efforts and Product Differentiation Financial Hedging
International Finance in Practice: Porsche Powers Profit with Currency Plays CASE APPLICATION: Exchange Risk Management at Merck Summary
MINI CASE: Economic Exposure of Albion Computers PLC
How to Measure Economic Exposure
1 Suppose the U.S. dollar substantially depreciates against the Japanese yen. The change in
exchange rate
a) Can have a significant economic consequences for U.S. firms. b) Can have a significant economic consequences for Japanese firms.
c) Can have a significant economic consequences for both U.S. and Japanese firms. d) None of the above Answer: c)
2 Suppose the U.S. dollar substantially depreciates against the Japanese yen. The change in
exchange rate
a) Will tend to weaken the competitive position of import-competing U.S. car makers. b) Will tend to strengthen the competitive position of import-competing U.S. car makers. c) Will tend to strengthen the competitive position of Japanese car makers at the expense of
U.S. makers. d) None of the above Answer: b)
3 When the Mexican peso collapsed in 1994, declining by 37 percent,
a) U.S. firms that exported to Mexico and priced in peso were adversely affected. b) U.S. firms that exported to Mexico and priced in dollars were adversely affected. c) U.S. firms were unaffected by the peso collapse, since Mexico is such a small market. d) Both a) and b) Answer: d)
Rationale: a) is obvious, the dollar value of revenue fell. Answer b) is less obvious, but those firm’s Mexican customers were less able to afford the imported goods.
4 When exchange rates change,
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a) U.S. firms that sell only to domestic customers will be unaffected.
b) U.S. firms that sell only to domestic customers can be affected if they compete against
imports.
c) U.S. firms that sell only to domestic customers will be affected, but only if they borrow
in foreign currency to finance their domestic operations. d) Both a) and b) Answer: b)
5 When exchange rates change,
a) This can alter the operating cash flow of a domestic firm. b) This can alter the competitive position of a domestic firm.
c) This can alter the home currency values of a multinational firm’s assets and liabilities. d) All of the above Answer: d)
6 Two recent studies have found a link between exchange rates and the stock prices of U.S.
firms,
a) This suggests that exchange rate changes can systematically affect the value of the firm
by influencing its operating cash flows.
b) This suggests that exchange rate changes can systematically affect the value of the firm
by influencing the domestic currency values of its assets and liabilities. c) a) and b)
d) None of the above Answer: c)
7 Economic exposure refers to(名词解释)
a) the sensitivity of realized domestic currency values of the firm’s contractual cash flows
denominated in foreign currencies to unexpected exchange rate changes
b) the extent to which the value of the firm would be affected by unanticipated changes in
exchange rate
c) the potential that the firm’s consolidated financial statement can be affected by changes
in exchange rates
d) ex post and ex ante currency exposures Answer: b)
8 It is conventional to classify foreign currency exposures into the following types:
a) economic exposure, transaction exposure, and translation exposure b) economic exposure, noneconomic exposure, and political exposure c) national exposure, international exposure, and trade exposure d) conversion exposure, and exchange exposure Answer: a)
9 Exposure to currency risk can be measured by the sensitivities of
a) the future home currency values of the firm’s assets and liabilities b) the firm’s operating cash flows to random changes in exchange rates c) a) and b)
d) none of the above Answer: c)
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10 Currency risk
a) is the same as currency exposure
b) represents random changes in exchange rates c) measure “what the firm has at risk” d) a) and b) Answer: b)
11 Suppose a U.S.-based MNC maintains a vacation home for employees in the British
countryside and the local price of this property is always moving together with the pound price of the U.S. dollar. As a result,
a) Whenever the pound depreciates against the dollar, the local currency price of this
property goes up by the same proportion.
b) The firm is not exposed to currency risk even if the pound-dollar exchange rate fluctuates
randomly. c) a) and b)
d) none of the above Answer: c)
12 The exposure coefficient in the regression P?a?b?S?e is given by:
a) b?Cov(P,S) Var(S)
b) P?a?b?S?e
c) a) and b) d) e Answer: a)
13 The exposure coefficient b?Cov(P,S) Var(S)in the regression P?a?b?S?e is:
a) A measure of how a change in the exchange rate affects the dollar value of a firm’s
assets.
b) Has a value of zero if the value of the firm’s assets is perfectly correlated with changes in
the exchange rate c) a) and b)
d) none of the above Answer: a)
14 The link between the home currency value of a firm’s assets and liabilities and exchange rate
fluctuations is: a) Asset exposure b) Operating exposure c) a) and b)
d) none of the above Answer: a)
15 The link between a firm’s future operating cash flows and exchange rate fluctuations is:
a) Asset exposure b) Operating exposure c) a) and b)
d) none of the above Answer: b)
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Operating Exposure: Definition
16 Operating exposure can be defined as:
a) the future home currency values of the firm’s assets and liabilities
b) the extent to which the firm’s operating cash flows would be affected by random changes
in exchange rates
c) the sensitivity of realized domestic currency values of the firm’s contractual cash flows
denominated in foreign currencies to unexpected exchange rate changes
d) the potential that the firm’s consolidated financial statement can be affected by changes
in exchange rates
Answer: b)
17 The variability of the dollar value of an asset (invested overseas) depends on:
a) the variability of the dollar value of the asset that is related to random changes in the
exchange rate
b) the dollar value variability that is independent of exchange rate movements c) a and b
d) none of the above Answer: c)
18 Consider a U.S. MNC who owns a foreign asset. If the foreign currency value of the asset is
inversely related to changes in the dollar-foreign currency exchange rate: a) the company has a built-in hedge
b) the dollar value variability that is independent of exchange rate movements c) a and b
d) none of the above Answer: c)
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USE THE FOLLOWING INFORMATION TO ANSWER THE NEXT FOUR QUESTIONS
A U.S. firm holds an asset in Great Britain and faces the following scenario: State 1 State 2 State 3 Probability 25% 50% 25% Spot rate $2.20/￡ $2.00/￡ $1.80/￡ *P ￡2,000 ￡2,500 ￡3,000 P $4,400 $5,000 $5,400 where,
P* = Pound sterling price of the asset held by the U.S. firm P = dollar price of the same asset
19 The expected value of the investment in U.S. dollars is:
a) $4,950 b) $3,700 c) $2,112.50
d) none of the above Answer: b) Rationale: E(P) = 0.25 × $4,400 + 0.50 × $5,000 + 0.25 × $5,400 = $4,950
20 The variance of the exchange rate is:
a) 0.00200 b) 0.10 c) 0.01
d) none of the above Answer: a) Rationale: E(S) = 0.25 × $2.20 + 0.50 × $2.00 + 0.25 × $1.80 = $.55 + $1 + $.45 = $2.00
VAR(S) = 0.25($2.20– $2.00)2 + 0.50($2.00 – $2.00)2 + 0.25($1.80 – $2.00)2 = 0.001 + 0 + 0.001 = 0.002
21 The “exposure” (i.e. the regression coefficient beta) is:
Hint: Calculate the expression
Cov(P,S)
Var(S)a) –25,000 b) 25,000 c) –25
d) none of the above Answer: a) Rationale: Cov(P,S) = 0.25×($4,400 – $4,950) × ($2.20 – $2.00)
+ 0.50× ($5,000 – $4,950) × ($2.00 – $2.00) + 0.25($5,400 – $4,950) ($1.80 – $2.00)
= –27.50 + 0 –22.50 = –50
b = –50/0.002 = –25,000
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国际金融9
