Exam Prep 2e Chapter.13 Global innovation management

Chapter 14

Test Bank

Type: true-false

Title: Chapter 14 Question 01

1) Since there is a time value to money the spot exchange rate of a currency is always lower than the forward exchange rate.

a. True

b. False

Feedback: Differences between the spot and forward rate at the time of purchasing the contract reflect market expectations. The forward exchange rate may be higher or lower than the spot rate.

A-head reference: 14.5 Insuring against foreign exchange risk

Type: true-false

Title: Chapter 14 Question 02

2) Transaction risk is associated with imports or exports when the timing of the payment and the exchange of the goods and services are not simultaneous or in the same currency.

a. True

Feedback: Correct because transactions already entered into will have a variable value when converted into the home-country currency because the exchange rate has moved.

A-head reference: 14.12 Transaction risk

b. False

Type: true-false

Title: Chapter 14 Question 03

3) A strategy to reduce transaction risk is to invoice the customer in the home-country currency.

a. True

Feedback: This is a strategy whereby the forex risk is transferred to the other party.

A-head reference: 14.12 Transaction risk

b. False

Type: true-false

Title: Chapter 14 Question 04

4) Translation risk has important implications for the balance sheet of the firm.

a. True

Feedback: Exchange rate change can alter the aggregate assets and liabilities in home-currency terms.

A-head reference: 14.13 Translation risk

b. False

Type: true-false

Title: Chapter 14 Question 05

5) Economic exposure arises from current effects of forex movements on the competitiveness of the global factory.

a. True

b. False

Feedback: Economic risk arises from the long-term effects of forex movements.

A-head reference: 14.14 Economic risk

Type: true-false

Title: Chapter 14 Question 06

6) Transfer pricing raises questions about internal managerial efficiency and corporate governance.

a. True

Feedback: Transfer prices are set internally and are susceptible to arbitrary manipulation by firms.

A-head reference: 14.15 Transfer pricing

b. False

Type: true-false

Title: Chapter 14 Question 07

7) Low-tax jurisdictions provide reason for accumulating funds in that jurisdiction.

a. True

Feedback: True because accumulating funds in low-tax jurisdictions reduces the potential ta liability of the global factory.

A-head reference: 14.15 Transfer pricing

b. False

Type: true-false

Title: Chapter 14 Question 08

8) Reinvoicing centres are centralised corporate financial management activities located in countries with more favourable regulatory environments.

a. True

Feedback: They act as a corporate clearing house for a global factory’s entire cross-border transactions and located in countries with relatively liberal rules on foreign exchange transactions.

A-head reference: 14.12 Transaction risk

b. False

Type: true-false

Title: Chapter 14 Question 09

9) A currency option gives the buyer the right, but not the obligation to buy or sell a specific currency at a specific exchange rate on or before a psecific date.

a. True

Feedback: A currency option is a hedging instrument that enables firms to insure against the downside risk of transaction exposure resulting from adverse exchange rate movements, while enabling them to capture any upside gains from favourable movements.

A-head reference: 14.12 Transaction risk

b. False

Type: true-false

Title: Chapter 14 Question 10

10) Exchange rate movements can affect demand for a global factory’s products at home and abroad.

a. True

Feedback: It is true, if a country’s currency depreciates in value relative to those in major export markets, exporting activities are likely to become more price-competitive.

A-head reference: 14.9 Exchange rates and the configuration of global factory networks

b. False

Type: multiple response question

Title: Chapter 9 Question 11

11) The cost of covering transaction exposure at arm’s length through hedging include _______ Please select all that apply.

Feedback: Hedging incurs some cost and a trade off needs to be found between the cost and the associated risk.

A-head reference: 14.12 Transaction risk

a. Cost of financing and hedging

b. Cost of organising and managing personnel to arrange cover for the exposure

c. Insurance costs

d. Opportunity cost of not hedging

Type: multiple response question

Title: Chapter 14 Question 12

12) The principle elements of translational exposure are _______ Please select all that apply.

Feedback: All of the options are correct. Translation exposure arises because assets and liabilities held in different currencies are not perfect substitutes for each other because of currency risks.

A-head reference: 14.13 Translation risk

a. Assets and liabilities denominated in foreign currencies

b. Profits and losses denominated in foreign currency

c. The principal payable on loans and debt

d. Share equity issued in another currency to raise equity

Type: multiple choice question

Title: Chapter 14 Question 13

13) This is one of the unique characteristics of the efficient market hypothesis: _______ Please select all that apply.

Feedback: The correct response is d), all market participants are equally well informed.

A-head reference: 14.8 Exchange rate forecasting

a. The market is not efficient

b. There are parties with superior market information

c. Participants act in their own interests

d. There are no information asymmetries

Type: multiple response question

Title: Chapter 14 Question 14

14) Key players in the wholesale and retail currency market are _______ Please select all that apply.

Feedback: The wholesale and retail markets consist of a number of key players.

A-head reference: 14.3 The global currency market

a. Central banks

b. Foreign exchange brokers

c. Commercial banks and other foreign exchange dealers

d. Firms

Type: multiple choice question

Title: Chapter 14 Question 15

15) The depreciation in the value of the host country’s currency relative to a home country does _______ Please select all that apply.

Feedback: The correct answer is b) because a negative relationship exists between exchange rate levels and inward FDI.

A-head reference: 14.5 Insuring against foreign exchange risk

a. Stimulate FDI outflows

b. Stimulate FDI inflows

c. Have no impact on FDI flows

d. Attract different forms of governance

Type: multiple choice question

Title: Chapter 14 Question 16

16) _______ are primarily used for longer term revenue conversion purposes than to deal with short-term conversion exposure.

Feedback: The correct answer is c) because currency swaps enable the global factory to hedge currency risk without the cost of purchasing forward foreign exchange contract.

A-head reference: 14.12 Transaction risk

a. Currency options

b. Futures hedge

c. Currency swaps

d. Money market hedging

Type: multiple choice question

Title: Chapter 14 Question 17

17) It is often claimed that the very existence of transfer pricing is indistinguishable from _______

Feedback: They provide opportunities for abuse by those firms that wish to take advantage of different tax rates between countries.

A-head reference: 14.15 Transfer pricing

a. Tax evasion or avoidance

b. Transparent financial management

c. Payments for intra-firm trade

d. Payments of royalties

Type: multiple choice question

Title: Chapter 14 Question 18

18) Transfer price manipulation enables a global factory to _______

Feedback: The value of prices can be manipulated to achieve transfer either in or out of national tax jurisdictions.

A-head reference: 14.15 Transfer pricing

a. Avoid price controls

b. Set transparent prices

c. To reduce country risk exposure by increasing revenues and profits

d. To reduce revenues and profits because of increasing country risk

Type: multiple choice question

Title: Chapter 14 Question 19

19) _______ occurs when subsidiaries settle intra-network currency debts for the net amount owed in a currency rather than the gross amount.

Feedback: The primary objective is to reconcile foreign currency payment sand receipts over a defined period of time so as to minimize all forex exposure.

A-head reference: 14.12 Transaction risk

a. Netting

b. Varying the speed of internal payments

c. Leading

d. Lagging

Type: multiple choice question

Title: Chapter 14 Question 20

20) _______ contracts are a regular feature of most business trading across borders in that they are an instrument to cover the currency risk of transaction.

Feedback: These contracts are entered into at the same time as an agreement to purchase or supply goods or services for a specified amount of a currency on a future maturity date and are usually bought over the counter from commercial banks.

A-head reference: 14.12 Transaction risk

a. Forward market hedge

b. Futures hedge

c. Currency option

d. Currency swap