11.4 Proactive Management of Operating Exposure

1) Which of the
following is NOT identified by your authors as a proactive management technique
to reduce exposure to foreign exchange risk?
A) matching
currency cash flows
B) currency swaps
C) remaining a
purely domestic firm
D) parallel loans

2) Which one of
the following management techniques is likely to best offset the risk of
long-run exposure to receivables denominated in a particular foreign currency?
A) borrow money
in the foreign currency in question
B) lend money in
the foreign currency in question
C) increase sales
to that country
D) increase sales
in this country

3) Which one of
the following management techniques is likely to best offset the risk of
long-run exposure to payables denominated in a particular foreign currency?
A) borrow money
in the foreign currency in question
B) lend money in
the foreign currency in question
C) rely on the
Federal Reserve Board to enact monetary policy favorable to your exposure risk
D) none of the
above

4) The particular
strategy of trying to offset inflows of cash from one country with outflows of
cash in the same currency is known as ________.
A) hedging
B)
diversification
C) matching
D) balancing

5) Which of the
following is NOT an acceptable hedging technique to reduce risk caused by a
relatively predictable long-term foreign currency inflow of Japanese yen?
A) Import raw
materials from Japan denominated in yen to substitute for domestic suppliers.
B) Pay suppliers
from other countries in yen.
C) Import raw
materials from Japan denominated in dollars.
D) Acquire debt
denominated in yen.

6) An MNE has a
contract for a relatively predictable long-term inflow of Japanese yen that the
firm chooses to hedge by seeking out potential suppliers in Japan. This hedging
strategy is referred to as ________.
A) a natural
hedge
B)
currency-switching
C) matching
D)
diversification

7) An MNE has a
contract for a relatively predictable long-term inflow of Japanese yen that the
firm chooses to hedge by paying for imports from Canada in Japanese yen. This
hedging strategy is known as ________.
A) a natural
hedge
B)
currency-switching
C) matching
D)
diversification

8) A U.S. timber
products firm has a long-term contract to import unprocessed logs from Canada.
To avoid occasional and unpredictable changes in the exchange rate between the
U.S. dollar and the Canadian dollar, the firms agree to split between the two
firms the impact of any exchange rate movement. This type of agreement is
referred to as ________.
A) risk-sharing
B)
currency-switching
C) matching
D) a natural
hedge

9) A ________
occurs when two business firms in separate countries arrange to borrow each
other’s currency for a specified period of time.
A) natural hedge
loan
B) forward loan
C) currency
switch loan
D) back-to-back
loan

10) A Canadian
firm with a U.S. subsidiary and a U.S. firm with a Canadian subsidiary agree to
a parallel loan agreement. In such an agreement, the Canadian firm is making
a/an ________ loan to the ________ subsidiary while effectively financing the
________ subsidiary.
A) indirect;
U.S.; Canadian
B) indirect;
Canadian; U.S.
C) direct; U.S.;
Canadian
D) direct;
Canadian; U.S.

11) Which of the
following is NOT an important impediment to widespread use of parallel loans?
A) difficulty in
finding an appropriate counterparty
B) the risk that
one of the parties will fail to return the borrowed funds when agreed
C) the process
does not avoid exchange rate risk
D) All of the
above are significant impediments.

12) A ________
resembles a back-to-back loan except that it does not appear on a firm’s
balance sheet.
A) forward loan
B) currency hedge
C) counterparty
D) currency swap

13) A ________ is
the term used to describe a foreign currency agreement between two parties to
exchange a given amount of one currency for another, and after a period of
time, to give back the original amounts.
A) matched flow
B) currency swap
C) back-to-back
loan
D) none of the
above

14) Currency
swaps are exclusively for periods of time under one year.

15) A British
firm and a U.S. Corporation each wish to enter into a currency swap hedging
agreement. The British firm is receiving U.S. dollars from sales in the U.S.
but wants pounds. The U.S. firm is receiving pounds from sales in Britain but
wants dollars. Which of the following choices would best satisfy the desires of
the firms?
A) The British
firm pays dollars to a swap dealer and receives pounds from the dealer. The
U.S. firm pays pounds to the swap dealer and receives dollars.
B) The U.S. firm
pays dollars to a swap dealer and receives pounds from the dealer. The British
firm pays pounds to the swap dealer and receives dollars.
C) The British
firm pays pounds to a swap dealer and receives pounds from the dealer. The U.S.
firm pays dollars to the swap dealer and receives dollars.
D) The British
firm pays dollars to a swap dealer and receives dollars from the dealer. The
U.S. firm pays pounds to the swap dealer and receives pounds.

16) Most swap
dealers arrange swaps so that each firm that is a party to the transaction does
not know who the counterparty is.

17) Most swap
dealers arrange swaps so that each firm that is a party to the transaction
knows who the counterparty is.

18) Swap
agreements are treated as off-balance sheet transactions via U.S. accounting
methods.

19) Swap agreements
are treated as line items on the balance sheet via U.S. accounting methods.

20) After being
introduced in the 1980s, currency swaps have remained a relatively
insignificant financial derivative instrument.

21) After being
introduced in the 1980s, currency swaps have gained increasing importance as
financial derivative instruments.

22) Which of the
following is NOT one of the commonly employed financial policies used to manage
operating and transaction exposure?
A) use of natural
hedges by matching currency cash flows
B) back-to-back
or parallel loans
C) currency swaps
D) All of the
above are commonly used financial policies for managing operating exposure.

23) Contractual
approaches (i.e., options and forwards) have occasionally been used to hedge
operating exposure, but are costly and possibly ineffectual.

24) Which of the
following is NOT a proactive policy for managing operating exposure?
A) matching
currency of cash flow
B) back-to-back
loans
C) cross currency
swap agreements
D) All of the
above are proactive management policies for operating exposure.