Multiple Choice
Identify the letter of the choice that best
completes the statement or answers the question.
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1.
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Chima’s Juice Company has just ordered an orange press machine from
Germany. Payment of 4000 Euro dollars will be due at the time of shipping which is in
approximately three months. What type of foreign exchange risk has the company just been
exposed to: a. | Translation
risk | b. | Transaction
risk | c. | Economic
risk | d. | Default
risk | | |
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2.
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Canadian Mercantile has a manufacturing facility in Bulgaria. Over the past year
the inflation rate in Bulgaria and Canada were 9.8% and 3.6% respectively. All of the company’s
financial statements are denominated in Canadian currency. Canadian Mercantile is exposed
to: a. | Translation risk | b. | Economic risk | c. | Translation and economic risk | d. | Translation and transaction risk | | |
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3.
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Transaction exposure cannot be managed by: a. | Matching purchases in Japanese yen with revenue generated
in yen | b. | Bill all sales in
home currency | c. | Match Mexican peso
debt with the value of fixed assets in Mexican subsidiaries | d. | Engage in forward market
contracts | | |
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4.
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India
is expected to have a higher inflation rate than Malaysia. The current spot price is .0829 Malaysian
ringgit/ Indian rupee. Holding everything else constant, what is the expected outcome of the
currencies over the next 6 – 12 months? a. | The rupee will depreciate relative to the ringgit based
upon Purchasing Power Parity | b. | The ringgit will depreciate relative to the rupee based
upon Purchasing Power Parity | c. | The value of the ringgit and rupee will remain constant
based upon the International Fisher Effect | d. | The ringgit will depreciate relative to the rupee based
upon the International Fisher Effect | | |
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5.
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Pacific
Manufacturing, based in Vancouver, has a manufacturing plant in Thailand. The strengthening of
the Canadian dollar relative to the Thai baht has increased the value of Pacific Manufacturing’s
balance sheet by $10 million. The primary increase has occurred because: a. | Economic exposure: operating costs in Thailand have
decreased | b. | Translation
exposure: The fixed asset value of the plant has increased in Canadian
dollars | c. | Translation
exposure: The company carries more liabilities in Thai bahts than
assets | d. | Transaction
exposure: operating costs in Thailand have increased | | |
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