Question

1. Assume that Nissan spends an average of 1.875 million yen to manufacture a car in Japan, plus $2,600 to market and distribute the car in the United States. Furthermore, Nissan adds 10% margin to price the car. The exchange rate is $1 = ¥100

a. Assuming that the exchange rate at the end of the year is expected to be $1 = ¥80, what will be the impact of the exchange rate on the dollar cost the auto?

b. If Nissan had wanted to sell the car at the same price at which they were selling earlier, by how much would it have to cut costs, given the exchange rate in part a above.

c. If the same car were manufactured in the United States at a cost of $19,000 and 40 percent of parts were imported from Japan, what impact would the different exchange rates have on the dollar cost?

d. Suggest some strategies that can be used by Nissan to counter strong yen.

e. Suggest some strategies that can be used by Nissan in a weak yen environment.

2.

a. Company Ziyu. is a U.S. based MNC with net cash inflows of euros and net cash inflows of Swiss francs. These two currencies are highly correlated in their movements against the dollar. Kang Co. is a U.S. based MNC that has the same level of net cash flows in these currencies as Ziyu Co. except that its euros represent net cash outflows. Which firm has a higher exposure to exchange rate risk? Why?

b. Stephanie Olive Co. is a U.S. based MNC with net cash inflows of Singapore dollars and net cash inflows of Sunland francs. These two currencies are highly negatively correlated in their movements against the dollar. Deepika Co. is a U.S. based MNC that has the same exposure as Stephanie Co. in these currencies, except that its Sunland francs represent cash outflows. Which firm has a high exposure to exchange rate risk? Why?

3. Which of the following operations benefits from appreciation of the firm’s local currency?

A) Borrowing in a foreign currency and converting the funds to the local currency prior to the appreciation.

B) Receiving earnings dividends from foreign subsidiaries.

C) Purchasing supplies locally rather than overseas.

D) Exporting to foreign countries.

4. Which of the following operations benefits from depreciation of the firm’s local currency?

A) Borrowing in a foreign country and converting the funds to the local currency prior to the depreciation.

B) Purchasing foreign supplies.

C) Investing in foreign bank accounts denominated in foreign currencies prior to depreciation of the local currency.

D) Borrowing in a foreign country and converting the funds to the local currency prior to the depreciation AND purchasing foreign supplies.

5. Chaoyi Co. is a U.S. company that has exposure to the Swiss francs (SF) and Danish kroner (DK). It has net inflows of SF200 million and net outflows of DK500 million. The present exchange rate of the SF is about $.40 while the present exchange rate of the DK is $.10. Chaoyi Co. has not hedged these positions. The SF and DK are highly correlated in their movements against the dollar. If the dollar weakens, then Chaoyi Co. will:

A) Benefit, because the dollar value of its SF position exceeds the dollar value of its DK position.

B) Benefit, because the dollar value of its DK position exceeds the dollar value of its SF position.

C) Be adversely affected, because the dollar value of its SF position exceeds the dollar value of its DK position.

D) Be adversely affected, because the dollar value of its DK position exceeds the dollar value of its SF position.

6. Generally, MNCs with less foreign costs than foreign revenue will be _______ affected by a _______ foreign currency.

A) Favorably; stronger

B) Not; stronger

C) Favorably; weaker

D) Not; weaker

7. When the dollar strengthens, the reported consolidated earnings of U.S. based MNCs are _______ affected by translation exposure. When the dollar weakens, the reported consolidated earnings are _______.

A) Favorably; favorably affected but by a smaller degree

B) Favorably; favorably affected by a higher degree

C) Unfavorably; favorably affected

D) Favorably; unfavorably affected

8. A firm produces goods for which substitute goods are produced in all countries. Appreciation of the firm’s local currency should:

A) Increase local sales as it reduces foreign competition in local markets.

B) Increase the firm’s exports denominated in the local currency.

C) Increase the returns earned on the firm’s foreign bank deposits.

D) Increase the firm’s cash outflow required to pay for imported supplies denominated in a foreign currency.

E) None of these.

9. A firm produces goods for which substitute goods are produced in all countries. Depreciation of the firm’s local currency should:

A) Decrease local sales as foreign competition in local markets is reduced.

B) Decrease the firm’s exports denominated in the local currency.

C) Decrease the returns earned on the firm’s foreign bank deposits.

D) Decrease the firm’s cash outflow required to pay for imported supplies denominated in a foreign currency.

E) None of these.

10. If a U.S. firm’s cost of goods sold exposure is much greater than its sales exposure in Switzerland, there is a _______ overall impact of the Swiss franc’s depreciation against the dollar on _______.

A) Positive; interest expenses

B) Positive; gross profit

C) Negative; gross profit

D) Negative; interest expenses

11. Subsidiary A of Mega Corporation has net inflows in Australian dollars of A$1,000,000, while Subsidiary B has net outflows in Australian dollars of A$1,500,000. The expected exchange rate of the Australian dollar is $.55. What the net inflow or outflow is as measured in U.S. dollars?

12. Xiling Co. is a U.S. company with sales to Canada amount¬ing to C$8 million. Its cost of materials attributable to the purchase of Canadian goods is C$6 million. Its interest expense on Canadian loans is C$4 million. Given these exact figures above, the dollar value of Whitewater’s “earnings before interest and taxes” would _______ if the Canadian dollar appreciates; the dollar value of Whitewater’s cash flows would _______ if the Canadian dollar appreciates.

A) Increase; increase

B) Decrease; increase

C) Decrease; decrease

D) Increase; decrease

E) Increase; be unaffected

12. Yichen Peng (a U.S. firm) has no subsidiaries and presently has sales to Mexican customers amounting to MXP98 million, while its peso denomin¬ated expenses amount to MXP41 million. If it shifts its material orders from its Mexican suppliers to U.S. suppliers, it could reduce peso denominated expenses by MXP12 million and increase dollar denominated expenses by $800,000. This strategy would _______ the Yichen’s exposure to changes in the peso’s movements against the U.S. dollar. Regardless of whether the firm shifts expenses, it is likely to perform better when the peso is valued _______ relative to the dollar.

A) Reduce; high

B) Reduce; low

C) Increase; low

D) Increase; high

13. Maura Watts Co. is a U.S. manufacturing firm that produces goods in the U.S. and sells all products to retail stores in the U.K.; the goods are denominated in pounds. It finances a small portion of its business with pound denominated loans from British banks. Which of the following is true? (Assume that the amount of products to be sold is guaranteed by contracts.)

A) The dollar value of sales is higher if the pound depre¬ciates against the dollar.

B) The dollar value of sales is unaffected by the pound’s exchange rate.

C) Both of these are true.

D) Neither of these is true.

14. Aashka Co. has some expenses and revenue in euros. If its expenses are more sensitive to exchange rate movements than revenue, it could reduce economic exposure by _______. If its revenues are more sensitive than expenses, it could reduce economic exposure by _______.

A) Decreasing foreign revenues; decreasing foreign expenses

B) Decreasing foreign revenues; increasing foreign expenses

C) Increasing foreign revenues; decreasing foreign revenues

D) Decreasing foreign expenses; increasing foreign revenues

15. If revenues and costs are equally sensitive to exchange rate movements, MNCs may reduce their economic exposure by restructuring their operations to shift the sources of costs or revenues to other locations so that:

A) Cash inflows exceed cash outflows in each foreign currency.

B) Cash outflows exceed cash inflows in each foreign currency.

C) Cash inflows match cash outflows in each foreign currency.

D) None of these.

Answer 1