International Finance Management- Quiz II

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  • 1/55 Questions

    All the following are foreign currency exposures, except:

    • Politic exposure
    • Economic exposure
    • Transaction exposure
    • Translation exposure
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About This Quiz

International Finance Management- Quiz II assesses understanding of economic, transaction, and translation exposures in finance. It evaluates how exchange rate fluctuations can impact a firm's market value, cash flows, and financial statements.

International Finance Management- Quiz II - Quiz

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  • 2. 

    A firm can reduce currency exposure by diversifying across different business lines. The idea is that although each individual business may be exposed to exchange risk to some degree, the firm as a whole may not face a significant exposure. This is a strategy related to what type of foreign currency exposure?

    • Operating exposure

    • Translation exposure

    • Transaction exposure

    • Asset exposure

    Correct Answer
    A. Operating exposure
    Explanation
    Diversification of the market is a strategy to mitigate operating exposure.

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  • 3. 

    Even if the firm has manufacturing facilities only in the domestic country, it can substantially lessen the effect of exchange rate changes by sourcing from where input costs are low. This is a strategy related to what type of foreign currency exposure?

    • Operating exposure

    • Translation exposure

    • Translation exposure

    • Asset exposure

    Correct Answer
    A. Operating exposure
    Explanation
    Flexible sourcing policy is a strategy to mitigate operating exposure.

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  • 4. 

    Investment in certain activities can lead to the introduction of new and unique products. The firm can strive to create a perception among consumers that its product is, indeed, different from those offered by competitors. Once the firm's product acquires a unique identity, its demand is less likely to be price sensitive. This is a strategy related to what type of foreign currency exposure?

    • Operating exposure

    • Translation exposure

    • Transaction exposure

    • Asset exposure

    Correct Answer
    A. Operating exposure
    Explanation
    Product differentiation and R&D efforts is a strategy to mitigate operating exposure.

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  • 5. 

    Tarifs, which are essentially taxes on imports imposed by the destination nation, is related too what reason to invest overseas?

    • Trade Barriers

    • Intangible assets

    • Vertical integration

    • Product life cycle

    Correct Answer
    A. Trade Barriers
    Explanation
    Trade barriers, such as tariffs, are taxes imposed on imports by the destination nation. These barriers can make it more expensive for companies to sell their products in foreign markets, which can discourage investment overseas. Therefore, the reason to invest overseas that is related to tariffs is trade barriers.

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  • 6. 

    Suppose that a Canadian computer company, NTK operates a wholly-owned French subsidiary, Calais Computers, that assembles and sells NTK computers throughout Europe. Calais Computers imports microprocessors from Intel, at a cost of $512 per unit at the current exchange rate of $1.60 per euro. The projected operating cash flow is €7,250.000 per year, which is equivalent to $11,600,000. A Euro depreciation would result in what kind of effect?

    • Competitive effect & conversion effect

    • Competitive effect only

    • Conversion effect only

    • There is no effect

    Correct Answer
    A. Competitive effect & conversion effect
    Explanation
    The competitive effect: a euro depreciation may affect operating cash flow in euros by altering the firm's competitive position in the marketplace.
    The conversion effect: a given operating cash flow in euros will be converted into a lower dollar amount after the euro depreciation.

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  • 7. 

    All of the following are strategies for managing operating exposure, except:

    • Selecting high-cost production sites

    • Financial hedging

    • Diversification of the market

    • Flexible sourcing policy

    Correct Answer
    A. Selecting high-cost production sites
    Explanation
    1 - Selecting LOW-cost production sites
    2 - Flexible sourcing policy
    3 - Diversification of the market
    4 - Product diferentiation and R&D efforts

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  • 8. 

    When the domestic currency is strong or expected to become strong, eroding the competitive position of the firm, it can choose to locate production facilities in a foreign country where costs are low due to either the undervalued currency or underpriced factors of production. This is a strategy related to what type of foreign currency exposure?

    • Operating exposure

    • Translation exposure

    • Transaction exposure

    • Asset exposure

    Correct Answer
    A. Operating exposure
    Explanation
    Selecting low-cost production site is a strategy to mitigate operating exposure.

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  • 9. 

    What type of exposure the two following factors are related? 1). The structure of the markets in which the firm sources its inputs (labor, materials, sells its products). 2). The firm's ability to mitigate the effect of exchange rate changes by adjusting its markets, product mix, and sourcing

    • Operating exposure

    • Transaction exposure

    • Translation exposure

    • Asset exposure

    Correct Answer
    A. Operating exposure
    Explanation
    A firm's operating exposure is determined by:
    1). the structure of the markets in which the firm sources its inputs, such as labor and materials, and sells its products.
    2). the firm's ability to mitigate the effect of exchange rate changes by adjusting its markets, product mix, and sourcing.

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  • 10. 

    What are the three major types of foreign currency exposures?

    • Economic, transaction, and translation exposures

    • Economic, transaction, and asset exposures

    • Operating, asset, and transaction exposures

    • Economic, operating, and translation exposures

    Correct Answer
    A. Economic, transaction, and translation exposures
    Explanation
    The three major types of foreign currency exposures are economic, transaction, and translation exposures. Economic exposure refers to the impact of exchange rate fluctuations on a company's future cash flows and overall competitiveness. Transaction exposure refers to the risk associated with specific transactions denominated in foreign currencies, such as imports or exports. Translation exposure refers to the impact of exchange rate fluctuations on the financial statements of a company's foreign subsidiaries.

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  • 11. 

    Refers to corporate investment when the corporation that makes the investment is foreign-owned. Usually it is done by multinational enterprise.

    • Foreign direct investment

    • Portfolio investment

    • Foreign indirect investment

    • International trade

    Correct Answer
    A. Foreign direct investment
    Explanation
    Foreign direct investment refers to a corporate investment made by a foreign-owned corporation. This type of investment is typically done by multinational enterprises. It involves the direct ownership or control of assets in a foreign country, such as the establishment of subsidiaries or the acquisition of existing businesses. Unlike portfolio investment, which involves the purchase of stocks and bonds, foreign direct investment allows for a more active role in managing and operating the invested assets. This distinction sets it apart from foreign indirect investment, which involves investing in foreign assets through intermediaries. International trade, on the other hand, refers to the exchange of goods and services between countries.

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  • 12. 

    It is a kind of foreign direct investment and involve building a new production facility in a foreign country.

    • Greenfield investment

    • Merge

    • Acquisition

    • IPO

    Correct Answer
    A. Greenfield investment
    Explanation
    A greenfield investment refers to the establishment of a new production facility in a foreign country. This type of investment involves starting from scratch and building the facility from the ground up. It is a form of foreign direct investment where a company enters a new market by investing in infrastructure, land, and equipment to create a new business entity. Unlike mergers or acquisitions, which involve buying existing companies, a greenfield investment allows the investing company to have full control over the operations and decision-making processes of the new facility.

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  • 13. 

    This refers to the potential that the firm's consolidated financial statements can be affected by changes in exchange rates. Consolidation involves the translation of subsidiaries' financial statements from local currencies to the home currency.

    • Translation exposure

    • Economic exposure

    • Transaction exposure

    • Operating exposure

    Correct Answer
    A. Translation exposure
    Explanation
    Translation exposure refers to the potential that the firm's consolidated financial statements can be affected by changes in exchange rates. Consolidation involves the translation of subsidiaries' financial statements from local currencies to the home currency.

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  • 14. 

    Firms can hire low-cost guest workers from foreign countries instead of high-cost domestic workers in order to be competitive. This is a strategy related to what type of foreign currency exposure?

    • Operating exposure

    • Translation exposure

    • Transaction exposure

    • Asset exposure

    Correct Answer
    A. Operating exposure
    Explanation
    Flexible sourcing policy is a strategy to mitigate operating exposure.

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  • 15. 

    All of the following are strategies for managing operating exposure, except:

    • Assess strategic plan impact

    • Financial hedging

    • Diversification of the market

    • Flexible sourcing policy

    Correct Answer
    A. Assess strategic plan impact
    Explanation
    1 - Selecting low-cost production sites
    2 - Flexible sourcing policy
    3 - Diversification of the market
    4 - Product diferentiation and R&D efforts

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  • 16. 

    Investment in certain activities can allow the firm to maintain and strengthen its competitive position in the face of adverse exchange rate movements. Successfully efforts allow the firm to cut costs and enhance productivity. In addition those efforts can lead to the introduction of new and unique products, which tends to be highly inelastic (i.e. price insensitive), the firm would be less exposed to exchange risk. This is a strategy related to what type of foreign currency exposure?

    • Operating exposure

    • Translation exposure

    • Transaction exposure

    • Asset exposure

    Correct Answer
    A. Operating exposure
    Explanation
    Product differentiation and R&D efforts is a strategy to mitigate operating exposure.

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  • 17. 

    Depending on the incidence, political risk can be classified in two types:

    • Macro-risk & Micro-risk

    • Macro-risk & Medium-risk

    • Transfer risk & Operational risk

    • Control risk & Management risk

    Correct Answer
    A. Macro-risk & Micro-risk
    Explanation
    Political risk refers to the potential for political events or decisions to negatively impact businesses or investments. Macro-risk refers to risks that affect an entire country or region, such as changes in government policies or regulations. Micro-risk, on the other hand, refers to risks that are specific to individual companies or industries, such as labor strikes or expropriation of assets. Therefore, the correct answer is Macro-risk & Micro-risk as it accurately describes the two types of political risks based on their scope and impact.

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  • 18. 

    A firm can reduce currency exposure by diversifying across different business lines. The idea is that although each individual business may be exposed to exchange risk to some degree, the firm as a whole may not face a significant exposure. What type of strategy to mitigate operating exposure is this scenario related to?

    • Diversification of the market

    • Selecting low-cost production sites

    • Flexible sourcing policy

    • Product diferentiation and R&D efforts

    Correct Answer
    A. Diversification of the market
    Explanation
    Diversification of the market
    A way of dealing with foreign exchange exposure is geographically diversification of the firm's sales pattern.
    A firm can reduce currency exposure by diversifying across different business lines. The idea is that although each individual business may be exposed to exchange risk to some degree, the firm as a whole may not face a significant exposure.

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  • 19. 

    This strategy can be used to stabilize the firm's cash flows. The firm can lend or borrow foreign currencies on a long-term basis. Or, the firm can use currency forward or options contracts and roll them over, if necessary. This is a strategy related to what type of foreign currency exposure?

    • Operating exposure

    • Translation exposure

    • Asset exposure

    • Diversification of the market exposure

    Correct Answer
    A. Operating exposure
    Explanation
    Financial hedging is a strategy to mitigate operating exposure.

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  • 20. 

    Samsung wanted to build production facilities for its consumer electronics products to serve North American markets. Samsung chose to locate its production facilities in Mexico, rather than in Canada or United States mainly because it wanted to take advantage of the lower costs of labour in Mexico. This is an example of:

    • Imperfect labour market

    • Trade barriers

    • Intangible assets

    • Vertical integration

    Correct Answer
    A. Imperfect labour market
    Explanation
    Samsung's decision to locate its production facilities in Mexico instead of Canada or the United States suggests that it wanted to take advantage of the lower labor costs in Mexico. This indicates that there is an imperfection in the labor market, as the availability and cost of labor differ across countries. If the labor market was perfectly efficient, Samsung would have chosen the location solely based on other factors such as proximity to markets or availability of resources, rather than labor costs. Therefore, the correct answer is "Imperfect labor market."

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  • 21. 

    Complete pass-through, no pass-through, and partial pass-through are strategies related to which of foreign currency exposure?

    • Operating exposure

    • Translation exposure

    • Transaction exposure

    • Asset exposure

    Correct Answer
    A. Operating exposure
    Explanation
    Facing exchange rate changes, a firm may choose one of the following three pricing strategies:
    1) pass the cost shock fully to its selling prices (complete pass-through).
    2) fully absorb the shock to keep its selling prices unaltered (no pass-through). 3) adopt some combination of the strategies described above (partial pass-through)

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  • 22. 

    A way of dealing with foreign exchange exposure is geographically diversification of the firm's sales pattern. This is a strategy related to what type of foreign currency exposure?

    • Operating exposure

    • Translation exposure

    • Transaction exposure

    • Asset exposure

    Correct Answer
    A. Operating exposure
    Explanation
    Diversification of the market is a strategy to mitigate operating exposure.

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  • 23. 

    Coca-cola has invested in bottling plants all over the world rather than licensing local firms to produce Coke. Coca-Cola chose FDI as a mode of entry into foreign markets for an obvious reason - it wanted to protect the formula for its famed soft drink. This is an example of:

    • Intangible asset

    • Tangible asset

    • Trade barrier

    • Product life-cycle

    Correct Answer
    A. Intangible asset
    Explanation
    The correct answer is "Intangible asset" because Coca-Cola's decision to invest in bottling plants worldwide instead of licensing local firms was driven by the need to protect the formula for its soft drink, which is an intangible asset. By maintaining control over the production process, Coca-Cola can ensure the secrecy and exclusivity of its formula, which gives it a competitive advantage in the market.

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  • 24. 

    It is a type of political risk where only selected areas of foreign business operations or particular foreign firms are affected.

    • Micro-risk

    • Macro-risk

    • Operational risk

    • Control risk

    Correct Answer
    A. Micro-risk
    Explanation
    Micro-risk refers to a specific type of political risk where only certain areas of foreign business operations or particular foreign firms are affected. This means that the risk is limited in scope and does not have a widespread impact. Unlike macro-risk, which affects the entire economy or industry, micro-risk is more localized and can be managed or mitigated through targeted strategies. Operational risk and control risk, on the other hand, are not directly related to political factors and focus more on internal processes and controls within a business.

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  • 25. 

    Consider a Canadian multinational firm that has subsidiaries in the United Kingdom and Japan. Each subsidiary produces financial statements in local currency. When the company consolidates a report in the home currency, it shows financial losses. What type of exposure does this scenario exemplify?

    • Translation exposure

    • Transaction exposure

    • Economic exposure

    • Asset exposure

    Correct Answer
    A. Translation exposure
    Explanation
    This scenario exemplifies translation exposure. Translation exposure refers to the risk that a company faces when it translates financial statements from a foreign subsidiary's local currency to the home currency for consolidation. In this case, the Canadian multinational firm is experiencing financial losses when consolidating the reports in its home currency, indicating the impact of translation exposure.

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  • 26. 

    Ford Mexicana, a subsidiary of Ford, which imports cars from its US parent and distributes them in Mexico. It the US Dollar appreciates against Mexican Peso, Ford Mexicana's costs go up in Peso terms. Whether this creates operating exposure for Ford critically depends on the structure of the car market in Mexico. If Ford Mexicana faces competition from domestic carmakers, is Ford parent firm to a high degree of operating exposure?

    • True

    • False

    Correct Answer
    A. True
    Explanation
    If Ford Mexicana faces competition from domestic carmakers whose Peso costs did not rise, it will not be able to raise the Peso price of imported Ford cars without risking a major reduction in sales. Facing a high domestic demand for its products, Ford Mexicana cannot let an exchange rate pass-through happen with regard to the peso price. As a result, an appreciation of the dollar will squeeze the profit of Ford Mexicana, subjecting the parent firm to a high degree of operating exposure.

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  • 27. 

    Investment in certain activities can allow the firm to maintain and strengthen its competitive position in the face of adverse exchange rate movements. Successfully efforts allow the firm to cut costs and enhance productivity. In addition those efforts can lead to the introduction of new and unique products, which tends to be highly inelastic (i.e. price insensitive), the firm would be less exposed to exchange risk. What type of strategy to mitigate operating exposure is this scenario related to?

    • Product differentiation and R&D efforts

    • Financial hedging

    • Flexible sourcing policy

    • Diversification of the market

    Correct Answer
    A. Product differentiation and R&D efforts
    Explanation
    Product differentiation and R&D efforts
    Investment in R&D activities can allow the firm to maintain and strengthen its competitive position in the face of adverse exchange rate movements. Successful R&D efforts allow the firm to cut costs and enhance productivity. In addition, R&D efforts can lead to the introduction of new and unique products for which competitors offer no close substitutes. Since the demand for unique products tends to be highly inelastic (i.e. price insensitive), the firm would be less exposed to exchange risk.
    At the same time, the firm can strive to create a perception among consumers that its product is, indeed, different from those offered by competitors. Once the firm's product acquires a unique identity, its demand is less likely to be price sensitive.

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  • 28. 

    This strategy can be used to stabilize the firm's cash flows. The firm can lend or borrow foreign currencies on a long-term basis. Or, the firm can use currency forward or options contracts and roll them over, if necessary. What type of strategy to mitigate operating exposure is this scenario related to?

    • Financial hedging

    • Selecting low-cost production sites

    • Flexible sourcing policy

    • Diversification of the market

    Correct Answer
    A. Financial hedging
    Explanation
    Financial hedging
    Financial hedging can be used to stabilize the firm's cash flows. For example, the firm can lend or borrow foreign currencies on a long-term basis. Or, the firm can use currency forward or options contracts and roll them over, if necessary.

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  • 29. 

    Investment in certain activities can lead to the introduction of new and unique products. The firm can strive to create a perception among consumers that its product is, indeed, different from those offered by competitors. Once the firm's product acquires a unique identity, its demand is less likely to be price sensitive. What type of strategy to mitigate operating exposure is this scenario related to?

    • Product differentiation and R&D efforts

    • Selecting low-cost production sites

    • Financial hedging

    • Diversification of the market

    Correct Answer
    A. Product differentiation and R&D efforts
    Explanation
    Product differentiation and R&D efforts
    Investment in R&D activities can allow the firm to maintain and strengthen its competitive position in the face of adverse exchange rate movements. Successful R&D efforts allow the firm to cut costs and enhance productivity. In addition, R&D efforts can lead to the introduction of new and unique products for which competitors offer no close substitutes. Since the demand for unique products tends to be highly inelastic (i.e. price insensitive), the firm would be less exposed to exchange risk.
    At the same time, the firm can strive to create a perception among consumers that its product is, indeed, different from those offered by competitors. Once the firm's product acquires a unique identity, its demand is less likely to be price sensitive.

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  • 30. 

    When the domestic currency is strong or expected to become strong, eroding the competitive position of the firm, it can choose to locate production facilities in a foreign country where costs are low due to either the undervalued currency or underpriced factors of production. What type of strategy to mitigate operating exposure is this scenario related to?

    • Selecting low-cost production sites

    • Flexible sourcing policy

    • Diversification of the market

    • Product diferentiation and R&D efforts

    Correct Answer
    A. Selecting low-cost production sites
    Explanation
    Selecting low-cost production sites
    When the domestic currency is strong or expected to become strong, eroding the competitive position of the firm, it can choose to locate production facilities in a foreign country where costs are low due to either the undervalued currency or underpriced factors of production.

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  • 31. 

    A way of dealing with foreign exchange exposure is geographically diversification of the firm's sales pattern. What type of strategy to mitigate operating exposure is this scenario related to?

    • Diversification of the market

    • Selecting low-cost production sites

    • Flexible sourcing policy

    • Product diferentiation and R&D efforts

    Correct Answer
    A. Diversification of the market
    Explanation
    Diversification of the market
    Another way of dealing with foreign exchange exposure is diversification of the market - that is, geographically diversification of the firm's sales pattern.

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  • 32. 

    Suppose Royal Shell purchases a significant portion of crude oil for its refinery facilities from Saudi oil company that owns the oil fields. If the Saudi company has stronger bargaining power, Royal Shell may be forced to pay a higher price than i would like to. The conflict between the upstream and downstream firms can be resolved through...

    • Vertical integration

    • Intangible asset

    • Horizontal integration

    • Trade barriers

    Correct Answer
    A. Vertical integration
    Explanation
    Vertical integration refers to the strategy of a company expanding its operations by acquiring or merging with firms at different stages of the supply chain. In this scenario, Royal Shell can resolve the conflict between the upstream (Saudi oil company) and downstream (Royal Shell's refinery facilities) firms by vertically integrating. By acquiring the Saudi oil company, Royal Shell would have control over the oil fields, eliminating the need to negotiate and pay a higher price for crude oil. This would give Royal Shell more control over its supply chain and potentially reduce costs, ensuring a more favorable position in bargaining with suppliers.

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  • 33. 

    It is a type of political risk where all foreign operations are affected by adverse political developments in the host country.

    • Marco-risk

    • Micro-risk

    • Operational risk

    • Control risk

    Correct Answer
    A. Marco-risk
    Explanation
    Marco-risk refers to a type of political risk that affects all foreign operations in a host country due to adverse political developments. This can include changes in government policies, political instability, or conflicts that can disrupt business operations and investments. It is a broader risk that impacts multiple operations and is not specific to any particular industry or company.

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  • 34. 

    Examples of intangible assets include all of the following, except:

    • Greenfield investments

    • Technology

    • Marketing know-how

    • Superior R&D

    Correct Answer
    A. Greenfield investments
    Explanation
    Greenfield investments are not examples of intangible assets because they refer to the establishment of a new business or project in a foreign country, typically involving physical assets such as land, buildings, and equipment. On the other hand, intangible assets are non-physical assets that provide long-term value to a company, such as technology, marketing know-how, and superior research and development capabilities.

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  • 35. 

    The following is obtained when the value of the combined firm is greater than the stand-alone valuations of the individual firms, in a cross-border acquisition.

    • Synergistic gains

    • Synergistic profit

    • Synergistic revenue

    • Synergistic loss

    Correct Answer
    A. Synergistic gains
    Explanation
    In a cross-border acquisition, when the value of the combined firm is greater than the stand-alone valuations of the individual firms, it indicates synergistic gains. This means that the merged company is able to achieve greater value and benefits by combining their resources, expertise, and market presence. The synergistic gains can result from cost savings, increased market share, improved efficiency, access to new markets, or enhanced product offerings. It signifies the positive impact and value created through the merger or acquisition.

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  • 36. 

    Depending on the manner in which firms are affected, political risk can be classified into three types. Which of the following is not a type of political risk?

    • Management risk

    • Transfer risk

    • Operational risk

    • Control risk

    Correct Answer
    A. Management risk
    Explanation
    The question asks for the type of political risk that is not included in the given options. The options provided are transfer risk, operational risk, and control risk. The correct answer is management risk, as it is not listed as one of the types of political risk. Therefore, management risk is not a type of political risk.

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  • 37. 

    Examples of intangible assets include all of the following, except:

    • Reduced labour costs

    • Managerial know-how

    • Brand power

    • Superior R&D capabilities

    Correct Answer
    A. Reduced labour costs
    Explanation
    Reduced labour costs are not considered intangible assets because they are a tangible benefit that can be measured and quantified. Intangible assets, on the other hand, are non-physical assets that cannot be physically touched or measured, such as intellectual property, brand reputation, or knowledge and expertise.

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  • 38. 

    All of the following are reasons to invest overseas, except:

    • Labor market perfection

    • Shareholder diversification services

    • Product life cycle

    • Intangible assets

    Correct Answer
    A. Labor market perfection
    Explanation
    Factors that are important in firms' decisions to invest overseas:
    - Trade barriers
    - Imperfect labour market
    - Intangible assets
    - Vertical integration
    - Product life cycle
    - Shareholder diversification services

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  • 39. 

    All of the following are reasons to invest overseas, except:

    • Shareholder standardization services

    • Trade barriers

    • Vertical integration

    • Imperfect labour market

    Correct Answer
    A. Shareholder standardization services
    Explanation
    Factors that are important in firms' decisions to invest overseas:
    - Trade barriers
    - Imperfect labour market
    - Intangible assets
    - Vertical integration
    - Product life cycle
    - Shareholder diversification services

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  • 40. 

    All of the following are foreign direct investment, except:

    • Bond

    • Greenfield investment

    • Merge

    • Aquisition

    Correct Answer
    A. Bond
    Explanation
    A bond is not considered foreign direct investment because it involves lending money to a company or government, rather than acquiring ownership or control over a foreign business entity. Foreign direct investment typically involves a company from one country making a substantial investment in a foreign country, such as establishing a new subsidiary (greenfield investment), merging with an existing foreign company, or acquiring a foreign company. Bonds, on the other hand, are debt instruments that provide fixed income to the bondholder but do not involve ownership or control.

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  • 41. 

    It is a type of political risk in which arises from uncertainty about cross-border flows of capital, payments, know-how, and the like.

    • Transfer risk

    • Macro-risk

    • Micro-risk

    • Control risk

    Correct Answer
    A. Transfer risk
    Explanation
    Transfer risk refers to the uncertainty surrounding the movement of capital, payments, knowledge, and other resources across international borders. This type of political risk arises when there are concerns about restrictions, regulations, or barriers that may hinder the transfer of these resources. It can impact businesses and investors who rely on cross-border transactions and can lead to financial losses or disruptions in operations.

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  • 42. 

    Even if the firm has manufacturing facilities only in the domestic country, it can substantially lessen the effect of exchange rate changes by sourcing from where input costs are low. What type of strategy to mitigate operating exposure is this scenario related to?

    • Flexible sourcing policy

    • Selecting low-cost production sites

    • Diversification of the market

    • Product diferentiation and R&D efforts

    Correct Answer
    A. Flexible sourcing policy
    Explanation
    Flexible sourcing policy
    Even if the firm has manufacturing facilities only in the domestic country, it can substantially lessen the effect of exchange rate changes by sourcing from where input costs are low. When the dollar is strong against most major currencies, multinational firms often purchase materials and components from low-cost foreign suppliers

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  • 43. 

    Multinational corporations (MNCs) undertake FDI in countries where inputs are available in order to secure their supply at a stable price. MNCs have significant control over the input market, this creates a barrier to entry to the industry. This strategic movement is called:

    • Vertical integration

    • Horizontal integration

    • Internalization theory

    • Product life-cycle theory

    Correct Answer
    A. Vertical integration
    Explanation
    Vertical integration is the correct answer because it refers to the strategic movement of a company to control multiple stages of the production process, including the inputs and the distribution channels. By undertaking FDI in countries where inputs are available, MNCs can secure their supply at a stable price and have significant control over the input market. This allows them to create a barrier to entry for other competitors in the industry.

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  • 44. 

    It is a type of political risk which arises from uncertainty about the host country's policy regarding ownership and control of local operations.

    • Control risk

    • Transfer risk

    • Operational risk

    • Micro-risk

    Correct Answer
    A. Control risk
    Explanation
    Control risk refers to the uncertainty and potential negative impact on a company's operations due to the host country's policies regarding ownership and control of local operations. This can include government regulations, restrictions, or changes in ownership laws that may affect the company's ability to maintain control over its operations. Control risk can create challenges for businesses in terms of decision-making, strategic planning, and overall operational efficiency.

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  • 45. 

    A Canadian company, which sold its products in Italy, realized financial losses when sending money back to Canada because the Canadian Dollar has appreciated against Euro. What type of exposure does this scenario exemplify?

    • Transaction exposure

    • Translation exposure

    • Economic exposure

    • Asset exposure

    Correct Answer
    A. Transaction exposure
    Explanation
    This scenario exemplifies transaction exposure. Transaction exposure refers to the risk that a company faces when conducting business transactions in a foreign currency. In this case, the Canadian company experienced financial losses when converting the proceeds from their product sales in Italy, denominated in Euros, back to Canadian Dollars. The appreciation of the Canadian Dollar against the Euro resulted in a lower value of the converted funds, leading to financial losses for the company.

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  • 46. 

    A Canadian firm sells its products only in the domestic market, which means there is no transaction risk involved in its business. However, the company revenues went down in the domestic market since the Canadian Dollar appreciated against the US Dollar. What type of exposure does this scenario exemplify?

    • Operating exposure

    • Translation exposure

    • Asset exposure

    • Transaction exposure

    Correct Answer
    A. Operating exposure
    Explanation
    This scenario exemplifies operating exposure. Operating exposure refers to the impact of currency fluctuations on a company's revenues and expenses when it operates in foreign markets. In this case, even though the Canadian firm sells its products only in the domestic market, the appreciation of the Canadian Dollar against the US Dollar has led to a decrease in revenues. This shows that the firm is exposed to currency risk, which is a characteristic of operating exposure.

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  • 47. 

    The extent to which the firm's operating cash flows would be affected by changes in exchange rates is the definition of...

    • Operating exposure

    • Transaction exposure

    • Translation exposure

    • Asset exposure

    Correct Answer
    A. Operating exposure
    Explanation
    Operating exposure refers to the extent to which a firm's operating cash flows would be affected by changes in exchange rates. It measures the potential impact of currency fluctuations on a company's ongoing business operations and profitability. This exposure arises due to changes in the value of foreign currency-denominated revenues, expenses, assets, and liabilities. It is different from transaction exposure, which refers to the impact of currency fluctuations on individual transactions, and translation exposure, which refers to the impact of currency fluctuations on the financial statements when consolidating foreign subsidiaries. Asset exposure is not a recognized term in the context of exchange rate risk.

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  • 48. 

    All of the following are strategies for managing operating exposure, except:

    • Selecting low-cost production sites

    • Flexible sourcing policy

    • Diversification of the market

    • Product standardization and R&D efforts

    Correct Answer
    A. Product standardization and R&D efforts
    Explanation
    1 - Selecting low-cost production sites
    2 - Flexible sourcing policy
    3 - Diversification of the market
    4 - Product DIFFERENTIATION and R&D efforts

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  • 49. 

    All of the following are reasons to invest overseas, except:

    • Product benefits

    • Imperfect labour market

    • Intangible assets

    • Trade barriers

    Correct Answer
    A. Product benefits
    Explanation
    Factors that are important in firms' decisions to invest overseas:
    - Trade barriers
    - Imperfect labour market
    - Intangible assets
    - Vertical integration
    - Product life cycle
    - Shareholder diversification services

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Quiz Review Timeline (Updated): Sep 2, 2023 +

Our quizzes are rigorously reviewed, monitored and continuously updated by our expert board to maintain accuracy, relevance, and timeliness.

  • Current Version
  • Sep 02, 2023
    Quiz Edited by
    ProProfs Editorial Team
  • Nov 29, 2015
    Quiz Created by
    Fabrisgs
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