Question

14. What are possible strategies to hedge economic exposure:

a.   Hedge with forward contracts

b.   Purchase foreign supplies

c.   Finance with foreign funds

d.   Change pricing policy

e.   all the above

18.   True or False. Financial institutions often use swaps to change either currency or interest rate exposure. For example, it is normal for institutions to trade a floating interest rate loan for a fixed loan.

20. True or False. Due to more available capital, an MNC will most always have a lower cost of debt than their domestic counterparts cost of debt.

Answer 1

(14) Economic exposure, also sometimes called operating exposure, is a measure of the change in the net present value of a company as a result of fluctuations in cash flow caused by changes in foreign exchange rate. Hedging economic exposure refers to saving an economy from foreign exchange risk.

All of the above is the answer as all of them helps in hedging economic exposure.

(15) True as financial institution acts as a broker between two counter parties who wish to enter into an interest rate or currency swap agreement and possibly remain anonymous.

(16) True as capital is available, MNC have more connection than their counterparts and they can have more loans on their brand image which is not possible for domestic.