Question

1. If a US company has net cash outflows in a foreign currency, which of the following is false?
(A) The US company would benefit from a drop-in value of the foreign currency.
(B) The US company would benefit from an increase in value of the foreign currency.
(C) The US company would suffer a loss from a decrease in value of the foreign currency.
(D) The appreciation or depreciation of the foreign currency would be irrelevant.
.........

2 A US firm that has cash flows in a foreign currency will have an economic GAIN if

I. the foreign currency appreciates, and the US firm has net cash inflows

II. the US firm has net cash outflows and the foreign currency depreciates

(A) I only

(B) II only

(C) Both I and II

(D) Neither I nor II

.......

3. The decision to exercise a call option would be based on

I. strike price

II. call premium

III. market price of the underlying security

(A) I and II

(B) II and III

(C) II only

(D) I only

................

4. Which of the following is FALSE regarding the US dollar?

(A) A strong US dollar makes domestic goods relatively more expensive than imported goods.

(B) A strong US dollar is better for a US company than a weak US dollar.

(C) A weak US dollar makes imported goods relatively cheaper than domestic goods.

(D) A weak US dollar makes domestic goods more expensive than

imported goods.

............

5. Wright International is a US firm that typically exports goods to Japan. Since the international receivables are denominated in yen, they are subject to fluctuating currency rates. To mitigate chis risk, Wright sometimes purchases put options to protect against loss from a decline in the yen. The put premium is relevant to the

I. decision to exercise the option

II. calculation of gain or loss on the exercise of the put option

(A) I only

(B) II only

(C) Both I and II

(D) Neither I nor II

pl explain answer

Answer 1

BASE : The term net cash outflow refers to money going out from organisation is more than the same coming in to the organisation.

The term foreign currency refers to functional currency of respective country.

1) Option B - If foreign currency will increase then obviously foreign exchange (conversion of one currency in to another) will also increase and US company will have to pay more amount than recorded (liability). Hence it will be loss for the company.

Option C - Keeping the same base as in above option if foreign currency decreases, foreign exchange will also decrease and therefore, company will have to pay less amount then recorded (liability) and US company will get benefited.

Option D - If US company is paying in foreign currency, then the payment amount is all depends upon the rate of that particular currency, and on the basis of which company will record its gain or loss. Hence appreciation and depreciation would definitely be a relevant factor for the same.