Baran

6、All of the following are methods of estimating a firm’s exposure to exchange rate risk EXCEPT:

A) estimating the slope of the demand curve.
 
B) constructing pro forma cash flow statements under various scenarios. 
 
C) simulation analysis based on exchange rate volatility.
 
D) regression of firm value changes on exchange rate changes. 

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

AIM 5: Describe the delta exposure of cash flow, its estimation when there are non-linear exposures to a risk factor.

 

1、Based on a single futures contract, which of the following cases is least likely to render a static hedge of foreign exchange exposure ineffective?

A) Exposure to uncorrelated price and quantity risks.
 
B) Multiple, perfectly correlated risk exposures. 
 
C) A nonlinear exposure to changes in the exchange rate.
 
D) Multiple, nonlinear exposures.

Baran

The correct answer is B

Nonlinear risk exposures and exposures to multiple uncorrelated risk exposures reduce the effectiveness of a static hedge based on a single futures contract.

Baran

2、Using the following regression to estimate changes in firm value, what is the marginal impact of a 10% increase in the value of the GBP?

Rz = α + 0.9 RM + (?0.3) RGBP

Where:

RZ = return for firm Z

RM = return on a market index

RGBP = percentage change in the USD/GBP exchange rate

 

A) - 3%.
 
B) - 10%.
 
C) - 9%.
 
D) - 30%.

Baran

The correct answer is A

(?0.3) × 0.1 = ?0.03 = ?3%

Baran

3、One approach to estimating a company’s exposures when there are multiple risk factors is to regress the return on the firm’s equity on percentage changes in risk factors. The major advantage of this approach is:

A) it incorporates nonlinearities in the relation between cash flows and risk factors.
 
B) it is robust to erroneous exclusion of potential risk factors.
 
C) regression coefficients are inherently forward-looking.
 
D) regression coefficients provide estimates of hedge ratios.

Baran

The correct answer is D

The coefficients from this type of regression are estimates of optimal hedge ratios. Weaknesses of this approach include the fact that the regression model assumes simple linear relations and that coefficient estimates are both sensitive to erroneous exclusion of risk factors and based on historical data, which makes the hedge ratios inherently backward-looking.