Forward or futures contracts to hedge its exposure to foreign payables
Project description
Question 1
An MNC frequently uses either forward or futures contracts to hedge its exposure to foreign payables. To do so, the MNC can either sell the foreign currency forward or sell futures.
True
False
Question 2
Graylon, Inc., based in Washington, exports products to a German firm and will receive payment of €200,000 in three months. On June 1, the spot rate of the euro was $1.12, and the 3-month forward rate was $1.10. On June 1, Graylon negotiated a forward contract with a bank to sell €200,000 forward in three months. The spot rate of the euro on September 1 is $1.15. Graylon will receive $____ for the euros.
224,000
220,000
200,000
230,000
Question 3
A purely domestic firm may be affected by exchange rate fluctuations if it faces at least some foreign competition.
True
False
Question 4
If a U.S.-based MNC focused completely on exporting, then its valuation would likely be adversely affected if most currencies were expected to appreciate against the dollar over time.
True
False
Question 5
An MNC frequently uses either forward or futures contracts to hedge its exposure to foreign receivables. To do so, the MNC can either sell the foreign currency forward or sell futures.
True
False
Question 6
Assume a Japanese firm invoices exports to the U.S. in U.S. dollars. Assume that the forward rate and spot rate of the Japanese yen are equal. If the Japanese firm expects the U.S. dollar to ____ against the yen, it would likely wish to hedge. It could hedge by ____ dollars forward.
depreciate; buying
depreciate; selling
appreciate; selling
appreciate; buying
Question 7
Assume that $1 is equal to .85 Euros and 98 yen. The value of yen in euros is
.01
118
1.18
.0087
Question 8
Imperfect markets represent conditions under which factors of production are immobile.
True
False
Question 9
An MNC will always use the same required rate of return in the valuation of foreign projects, as it would for its domestic projects.
True
False
Question 10
If a U.S. firm sets up a plant in Mexico to benefit from low cost labor, it will likely have a comparative advantage over other firms in Mexico that sell the same product.
True
False
Question 11
The interest rate in developing countries is usually very low.
True
False
Question 12
The degree of financial information that must be provided by public companies is the same among countries.
True
False
Question 13
Saller Co. has a subsidiary in Mexico. The expected cash flows in pesos to be received in the future from this subsidiary have not changed since last month, but the valuation of Saller Co. has declined since last month. What could’ve caused this decline in value?
A weaker Mexican economy
Lower Mexican interest rates
Depreciation of the Mexican peso
Appreciation of the Mexican peso.
Question 14
Jensen Co. wants to establish a new subsidiary in Mexico that will sell computers to Mexican customers and remit earnings back to the U.S. parent. The value of this project will be favorably affected if the value of the peso ____ while it establishes the new subsidiary and ____ when the subsidiary starts operations.
depreciates; appreciates
appreciates; appreciates
appreciates; depreciates
depreciates; depreciates
Question 15
J&L Co. is a U.S.-based MNC that frequently exports computers to Italy. J&L typically invoices these goods in euros and is concerned that the euro will depreciate in the near future. Which of the following is not an appropriate technique under these circumstances?
purchase euro put options.
sell euros forward.
sell euro futures contracts.
sell euro put options.
Question 16
A U.S.-based MNC has many foreign subsidiaries in Europe and does not expect to increase its investment there. Its value should increase if the value of the euro weakens over time.
True
False
Question 17
Assume that Live Co. has expected cash flows of $200,000 from domestic operations, SF200,000 from Swiss operations, and 150,000 euros from Italian operations at the end of the year. The Swiss franc’s value and euro’s value are expected to be $.83 and $1.29 respectively, at the end this year. What are the expected dollar cash flows of Live Co?
$200,000
$559,500
$582,500
$393,500
Question 18
In comparing exporting to direct foreign investment (DFI), an exporting operation will likely incur ____ fixed production costs and ____ transportation costs than DFI.
higher; higher
higher; lower
lower; lower
lower; higher
Question 19
Licensing is the process by which a firm provides its technology (copyrights, patents, trademarks, or trade names) in exchange for fees or some other specified benefits.
True
False
Question 20
One form of an exposure to political risk is terrorism.
True
False
Question 21
Forward contracts are usually negotiated with a commercial bank, while futures contracts are traded on an organized exchange.
True
False
Question 22
If a U.S.-based MNC focused completely on importing, then its valuation would likely be adversely affected if most currencies were expected to appreciate against the dollar over time.
True
False
Question 23
A forward contract can be used to lock in the ____ of a specified currency for a future point in time.
purchase price
sale price
A or B
none of the above
.
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