Baran

The correct answer is A

The elasticity of demand may enter into the calculations, but by itself, the slope of the demand curve does not provide an estimate of risk-factor exposure.

Baran

7、Cash flow exposure to exchange rate changes is measured as:

A) cash flow volatility times covariance.
 
B) cash flow change per unit change in the exchange rate. 
 
C) the 5% CAR based on exchange rate volatility. 
 
D) the standard deviation of cash flow.

Baran

The correct answer is B

Cash flow exposure is measured as the cash flow change per unit change in the exchange rate.

Baran

The correct answer is B

Competitive exposure is the sensitivity of the firm’s cash flow to a change in the risk factor resulting from changes in the firm’s competitive position.

Baran

 4、A U.S.-based company exports consumer goods to Britain and is concerned with the U.S. dollar value of revenue from British sales. A futures hedge is unnecessary if British pound revenues:

A) have a correlation with the value of the pound of +0.5.
 
B) are perfectly negatively correlated with the value of the pound.
 
C) are perfectly positively correlated with the value of the pound. 
 
D) are uncorrelated with the value of the pound.

Baran

The correct answer is B

If pound revenues are perfectly negatively correlated with the value of the pound, there is no need to hedge, as the dollar value of pound revenues is constant.

Baran

5、XPORT Inc. exports consumer goods to Britain. The firm would like to hedge its foreign currency exposure by taking a position in a futures contract on the British pound. If British sales, denominated in pounds, are uncorrelated with changes in the value of the pound:

A) the firm cannot construct a perfect hedge.
 
B) the firm will be able to construct a perfect hedge.
 
C) the firm has no need to hedge.
 
D) any hedge will be completely ineffective.

Baran

The correct answer is C

Transactions exposure results from having receivables from past business deals in which the firm will receive payment in a foreign currency.

Baran

2、Short-dated futures contracts are most effective for hedging which type of foreign exchange exposure?

A) Translation exposure.
 
B) Transactions exposure.
 
C) Competitive exposure.
 
D) Quantity exposure.

Baran

The correct answer is B

Transactions exposure is related to receivables and payables that are already booked. Thus, transactions exposure represents known, short-term cash flows that can be effectively hedged.