Deck 10: Transaction and Translation Exposure

Question 1

A U.S.firm sells merchandise today to a British company for £100,000. The current exchange rate is $2.03/£ ,the account is payable in three months,and the firm chooses to avoid any hedging techniques designed to reduce or eliminate the risk of changes in the exchange rate.If the exchange rate changes to $2.01/£ the U.S.firm will realize a ________ of ________.

A)loss; $2,000
B)gain; $2,000
C)loss; £2000
D)gain; £2000

Answer 1

loss; $2,000

Question 2

________ exposure deals with cash flows that result from existing contractual obligations.

A)Operating
B)Transaction
C)Translation
D)Economic

Answer 2

Transaction

Question 3

Which of the following is NOT cited as a good reason for hedging currency exposures?

A)Reduced risk of future cash flows is a good planning tool.
B)Reduced risk of future cash flows reduces the probability that the firm may not meet required cash flows.
C)Currency risk management increases the expected cash flows to the firm.
D)Management is in a better position to assess firm currency risk than individual investors.

Answer 3

Currency risk management increases the expected cash flows to the firm.

Question 4

________ exposure is the potential for accounting-derived changes in owner's equity to occur because of the need to translate foreign currency financial statements into a single reporting currency.

A)Transaction
B)Operating
C)Economic
D)Accounting

Question 5

Hedging,or reducing risk,is the same as adding value or return to the firm.

Question 6

The key arguments in opposition to currency hedging such as market efficiency,agency theory,and diversification do not have financial theory at their core.

Question 7

Each of the following is another name for operating exposure EXCEPT ________.

A)economic exposure
B)strategic exposure
C)accounting exposure
D)competitive exposure

Question 8

Assuming no transaction costs (i.e.,hedging is "free"),hedging currency exposures should ________ the variability of expected cash flows to a firm and at the same time,the expected value of the cash flows should ________.

A)increase; not change
B)decrease; not change
C)not change; increase
D)not change; not change

Question 9

A U.S.firm sells merchandise today to a British company for £100,000. The current exchange rate is $2.03/£ ,the account is payable in three months,and the firm chooses to avoid any hedging techniques designed to reduce or eliminate the risk of changes in the exchange rate.If the exchange rate changes to $2.05/£ the U.S.firm will realize a ________ of ________.

A)loss; $2000
B)gain; $2000
C)loss; £2000
D)gain; £2000

Question 10

MNE cash flows may be sensitive to changes in which of the following?

A)exchange rates
B)interest rates
C)commodity prices
D)all of the above

Question 11

Transaction exposure and operating exposure exist because of unexpected changes in future cash flows.The difference between the two is that ________ exposure deals with cash flows already contracted for,while ________ exposure deals with future cash flows that might change because of changes in exchange rates.

A)transaction; operating
B)operating; transaction
C)operating; accounting
D)none of the above

Question 12

________ is NOT a popular contractual hedge against foreign exchange transaction exposure.

A)Forward market hedge
B)Money market hedge
C)Options market hedge
D)All of the above are contractual hedges.

Question 13

________ exposure may result from a firm having a payable in a foreign currency.

A)Transaction
B)Accounting
C)Operating
D)None of the above

Question 14

Losses from ________ exposure generally reduce taxable income in the year they are realized.________ exposure losses are not cash losses and therefore,are not tax deductible.

A)transaction; Operating
B)accounting; Operating
C)accounting; Transaction
D)transaction; Translation

Question 15

________ is a technique used by MNEs to deal with currency exposure.

A)No counter-measure
B)Speculation
C)Hedging
D)All are techniques MNEs could use.

Question 16

Losses from ________ exposure generally reduce taxable income in the year they are realized.________ exposure losses may reduce taxes over a series of years.

A)accounting; Operating
B)operating; Transaction
C)transaction; Operating
D)transaction; Accounting

Question 17

________ exposure measures the change in the present value of the firm resulting from unexpected changes in exchange rates.

A)Operating
B)Transaction
C)Translation
D)Accounting

Question 18

There is considerable question among investors and managers about whether hedging is a good and necessary tool.

Question 19

A U.S.firm sells merchandise today to a British company for £100,000. The current exchange rate is $2.03/£ ,the account is payable in three months,and the firm chooses to avoid any hedging techniques designed to reduce or eliminate the risk of changes in the exchange rate.The U.S.firm is at risk today of a loss if

A)the exchange rate changes to $2.00/£.
B)the exchange rate changes to $2.05/£.
C)the exchange rate doesn't change.
D)all of the above.

Question 20

Which of the following is cited as a good reason for NOT hedging currency exposures?

A)Shareholders are more capable of diversifying risk than management.
B)Currency risk management through hedging does not increase expected cash flows.
C)Hedging activities are often of greater benefit to management than to shareholders.
D)All of the above are cited as reasons NOT to hedge.

Question 21

Use the information for the following problem(s).
Plains States Manufacturing has just signed a contract to sell agricultural equipment to Boschin, a German firm, for euro 1,250,000. The sale was made in June with payment due six months later in December. Because this is a sizable contract for the firm and because the contract is in euros rather than dollars, Plains States is considering several hedging alternatives to reduce the exchange rate risk arising from the sale. To help the firm make a hedging decision you have gathered the following information.
∙ The spot exchange rate is $1.40/euro
∙ The six month forward rate is $1.38/euro
∙ Plains States' cost of capital is 11%
∙ The Euro zone 6-month borrowing rate is 9% (or 4.5% for 6 months)
∙ The Euro zone 6-month lending rate is 7% (or 3.5% for 6 months)
∙ The U.S. 6-month borrowing rate is 8% (or 4% for 6 months)
∙ The U.S. 6-month lending rate is 6% (or 3% for 6 months)
∙ December put options for euro 625,000; strike price $1.42, premium price is 1.5%
∙ Plains States' forecast for 6-month spot rates is $1.43/euro
∙ The budget rate, or the lowest acceptable sales price for this project, is $1,075,000 or $1.35/euro
Refer to Instruction 10.1.If Plains States chooses to hedge its transaction exposure in the forward market,it will ________ euro 1,250,000 forward at a rate of ________.

A)sell; $1.38/euro
B)sell; $1.40/euro
C)buy; $1.38/euro
D)buy; $1.40/euro

Question 22

Historical exchange rates may be used for ________,while current exchange rates may be used for ________.

A)fixed asses and current assets; income and expense items
B)equity accounts and fixed assets; current assets and liabilities
C)current assets and liabilities; equity accounts and fixed assets
D)equity accounts and current liabilities; current assets and fixed assets

Question 23

Use the information for the following problem(s).
Plains States Manufacturing has just signed a contract to sell agricultural equipment to Boschin, a German firm, for euro 1,250,000. The sale was made in June with payment due six months later in December. Because this is a sizable contract for the firm and because the contract is in euros rather than dollars, Plains States is considering several hedging alternatives to reduce the exchange rate risk arising from the sale. To help the firm make a hedging decision you have gathered the following information.
∙ The spot exchange rate is $1.40/euro
∙ The six month forward rate is $1.38/euro
∙ Plains States' cost of capital is 11%
∙ The Euro zone 6-month borrowing rate is 9% (or 4.5% for 6 months)
∙ The Euro zone 6-month lending rate is 7% (or 3.5% for 6 months)
∙ The U.S. 6-month borrowing rate is 8% (or 4% for 6 months)
∙ The U.S. 6-month lending rate is 6% (or 3% for 6 months)
∙ December put options for euro 625,000; strike price $1.42, premium price is 1.5%
∙ Plains States' forecast for 6-month spot rates is $1.43/euro
∙ The budget rate, or the lowest acceptable sales price for this project, is $1,075,000 or $1.35/euro
Refer to Instruction 10.1.If Plains States chooses to implement a money market hedge for the Euro receivables,how much money will the firm borrow today?

A)euro 1,201,923
B)$1,201,923
C)euro 1,196,172
D)$1,196,172

Question 24

Use the information for the following problem(s).
Plains States Manufacturing has just signed a contract to sell agricultural equipment to Boschin, a German firm, for euro 1,250,000. The sale was made in June with payment due six months later in December. Because this is a sizable contract for the firm and because the contract is in euros rather than dollars, Plains States is considering several hedging alternatives to reduce the exchange rate risk arising from the sale. To help the firm make a hedging decision you have gathered the following information.
∙ The spot exchange rate is $1.40/euro
∙ The six month forward rate is $1.38/euro
∙ Plains States' cost of capital is 11%
∙ The Euro zone 6-month borrowing rate is 9% (or 4.5% for 6 months)
∙ The Euro zone 6-month lending rate is 7% (or 3.5% for 6 months)
∙ The U.S. 6-month borrowing rate is 8% (or 4% for 6 months)
∙ The U.S. 6-month lending rate is 6% (or 3% for 6 months)
∙ December put options for euro 625,000; strike price $1.42, premium price is 1.5%
∙ Plains States' forecast for 6-month spot rates is $1.43/euro
∙ The budget rate, or the lowest acceptable sales price for this project, is $1,075,000 or $1.35/euro
Refer to Instruction 10.1.If Plains States locks in the forward hedge at $1.38/euro,and the spot rate when the transaction was recorded on the books was $1.40/euro,this will result in a "foreign exchange loss" accounting transaction of ________.

A)$0
B)$25,000
C)This was not a loss; it was a gain of $25,000.
D)There is not enough information to answer this question.

Question 25

Use the information for the following problem(s).
Plains States Manufacturing has just signed a contract to sell agricultural equipment to Boschin, a German firm, for euro 1,250,000. The sale was made in June with payment due six months later in December. Because this is a sizable contract for the firm and because the contract is in euros rather than dollars, Plains States is considering several hedging alternatives to reduce the exchange rate risk arising from the sale. To help the firm make a hedging decision you have gathered the following information.
∙ The spot exchange rate is $1.40/euro
∙ The six month forward rate is $1.38/euro
∙ Plains States' cost of capital is 11%
∙ The Euro zone 6-month borrowing rate is 9% (or 4.5% for 6 months)
∙ The Euro zone 6-month lending rate is 7% (or 3.5% for 6 months)
∙ The U.S. 6-month borrowing rate is 8% (or 4% for 6 months)
∙ The U.S. 6-month lending rate is 6% (or 3% for 6 months)
∙ December put options for euro 625,000; strike price $1.42, premium price is 1.5%
∙ Plains States' forecast for 6-month spot rates is $1.43/euro
∙ The budget rate, or the lowest acceptable sales price for this project, is $1,075,000 or $1.35/euro
Refer to Instruction 10.1.The cost of a call option to Plains States would be ________.

A)$17,653
B)$16,733
C)$18,471
D)There is not enough information to answer this question.

Question 26

Use the information for the following problem(s).
Plains States Manufacturing has just signed a contract to sell agricultural equipment to Boschin, a German firm, for euro 1,250,000. The sale was made in June with payment due six months later in December. Because this is a sizable contract for the firm and because the contract is in euros rather than dollars, Plains States is considering several hedging alternatives to reduce the exchange rate risk arising from the sale. To help the firm make a hedging decision you have gathered the following information.
∙ The spot exchange rate is $1.40/euro
∙ The six month forward rate is $1.38/euro
∙ Plains States' cost of capital is 11%
∙ The Euro zone 6-month borrowing rate is 9% (or 4.5% for 6 months)
∙ The Euro zone 6-month lending rate is 7% (or 3.5% for 6 months)
∙ The U.S. 6-month borrowing rate is 8% (or 4% for 6 months)
∙ The U.S. 6-month lending rate is 6% (or 3% for 6 months)
∙ December put options for euro 625,000; strike price $1.42, premium price is 1.5%
∙ Plains States' forecast for 6-month spot rates is $1.43/euro
∙ The budget rate, or the lowest acceptable sales price for this project, is $1,075,000 or $1.35/euro
Refer to Instruction 10.1.If Plains States chooses not to hedge their euro receivable,the amount they receive in six months will be ________.

A)$1,750,000
B)$1,250,000
C)$892,857
D)undeterminable today

Question 27

________ exposure is the potential for an increase or decrease in the parent company's net worth and reported net income caused by a change in exchange rates since the last transaction.

A)Transaction
B)Operating
C)Currency
D)Translation

Question 28

Use the information for the following problem(s).
Plains States Manufacturing has just signed a contract to sell agricultural equipment to Boschin, a German firm, for euro 1,250,000. The sale was made in June with payment due six months later in December. Because this is a sizable contract for the firm and because the contract is in euros rather than dollars, Plains States is considering several hedging alternatives to reduce the exchange rate risk arising from the sale. To help the firm make a hedging decision you have gathered the following information.
∙ The spot exchange rate is $1.40/euro
∙ The six month forward rate is $1.38/euro
∙ Plains States' cost of capital is 11%
∙ The Euro zone 6-month borrowing rate is 9% (or 4.5% for 6 months)
∙ The Euro zone 6-month lending rate is 7% (or 3.5% for 6 months)
∙ The U.S. 6-month borrowing rate is 8% (or 4% for 6 months)
∙ The U.S. 6-month lending rate is 6% (or 3% for 6 months)
∙ December put options for euro 625,000; strike price $1.42, premium price is 1.5%
∙ Plains States' forecast for 6-month spot rates is $1.43/euro
∙ The budget rate, or the lowest acceptable sales price for this project, is $1,075,000 or $1.35/euro
Refer to Instruction 10.1.Plains States would be ________ by an amount equal to ________ with a forward hedge than if they had not hedged and their predicted exchange rate for 6 months had been correct.

A)better off; $43,750
B)better off; $62,500
C)worse off; $43,750
D)worse off; $62,500

Question 29

Use the information for the following problem(s).
Plains States Manufacturing has just signed a contract to sell agricultural equipment to Boschin, a German firm, for euro 1,250,000. The sale was made in June with payment due six months later in December. Because this is a sizable contract for the firm and because the contract is in euros rather than dollars, Plains States is considering several hedging alternatives to reduce the exchange rate risk arising from the sale. To help the firm make a hedging decision you have gathered the following information.
∙ The spot exchange rate is $1.40/euro
∙ The six month forward rate is $1.38/euro
∙ Plains States' cost of capital is 11%
∙ The Euro zone 6-month borrowing rate is 9% (or 4.5% for 6 months)
∙ The Euro zone 6-month lending rate is 7% (or 3.5% for 6 months)
∙ The U.S. 6-month borrowing rate is 8% (or 4% for 6 months)
∙ The U.S. 6-month lending rate is 6% (or 3% for 6 months)
∙ December put options for euro 625,000; strike price $1.42, premium price is 1.5%
∙ Plains States' forecast for 6-month spot rates is $1.43/euro
∙ The budget rate, or the lowest acceptable sales price for this project, is $1,075,000 or $1.35/euro
Refer to Instruction 10.1.Plains States chooses to hedge its transaction exposure in the forward market at the available forward rate.The payoff in 6 months will be ________.

A)$1,750,000
B)$1,250,000
C)$1,725,000
D)$1,787,500

Question 30

Translation exposure may also be called ________ exposure.

A)transaction
B)operating
C)accounting
D)currency

Question 31

Use the information for the following problem(s).
Plains States Manufacturing has just signed a contract to sell agricultural equipment to Boschin, a German firm, for euro 1,250,000. The sale was made in June with payment due six months later in December. Because this is a sizable contract for the firm and because the contract is in euros rather than dollars, Plains States is considering several hedging alternatives to reduce the exchange rate risk arising from the sale. To help the firm make a hedging decision you have gathered the following information.
∙ The spot exchange rate is $1.40/euro
∙ The six month forward rate is $1.38/euro
∙ Plains States' cost of capital is 11%
∙ The Euro zone 6-month borrowing rate is 9% (or 4.5% for 6 months)
∙ The Euro zone 6-month lending rate is 7% (or 3.5% for 6 months)
∙ The U.S. 6-month borrowing rate is 8% (or 4% for 6 months)
∙ The U.S. 6-month lending rate is 6% (or 3% for 6 months)
∙ December put options for euro 625,000; strike price $1.42, premium price is 1.5%
∙ Plains States' forecast for 6-month spot rates is $1.43/euro
∙ The budget rate, or the lowest acceptable sales price for this project, is $1,075,000 or $1.35/euro
Refer to Instruction 10.1.A ________ hedge allows Plains States to enjoy the benefits of a favorable change in exchange rates for their euro receivables contract while protecting the firm from unfavorable exchange rate changes.

A)forward
B)call option
C)put option
D)money market

Question 32

Use the information for the following problem(s).
Plains States Manufacturing has just signed a contract to sell agricultural equipment to Boschin, a German firm, for euro 1,250,000. The sale was made in June with payment due six months later in December. Because this is a sizable contract for the firm and because the contract is in euros rather than dollars, Plains States is considering several hedging alternatives to reduce the exchange rate risk arising from the sale. To help the firm make a hedging decision you have gathered the following information.
∙ The spot exchange rate is $1.40/euro
∙ The six month forward rate is $1.38/euro
∙ Plains States' cost of capital is 11%
∙ The Euro zone 6-month borrowing rate is 9% (or 4.5% for 6 months)
∙ The Euro zone 6-month lending rate is 7% (or 3.5% for 6 months)
∙ The U.S. 6-month borrowing rate is 8% (or 4% for 6 months)
∙ The U.S. 6-month lending rate is 6% (or 3% for 6 months)
∙ December put options for euro 625,000; strike price $1.42, premium price is 1.5%
∙ Plains States' forecast for 6-month spot rates is $1.43/euro
∙ The budget rate, or the lowest acceptable sales price for this project, is $1,075,000 or $1.35/euro
Refer to Instruction 10.1.Money market hedges almost always return more than forward hedges because of the greater risk involved.

Question 33

Translation exposure measures

A)changes in the value of outstanding financial obligations incurred prior to a change in exchange rates.
B)the potential for an increase or decrease in the parent company's net worth and reported net income caused by a change in exchange rates since the last consolidation of international operations.
C)an unexpected change in exchange rates impact on short run expected cash flows.
D)none of the above.

Question 34

According to your authors,the main purpose of translation is

A)to prepare consolidated financial statements.
B)to help management assess the performance of foreign subsidiaries.
C)to act as an interpreter for managers without foreign language skills.
D)none of the above.

Question 35

Use the information for the following problem(s).
Plains States Manufacturing has just signed a contract to sell agricultural equipment to Boschin, a German firm, for euro 1,250,000. The sale was made in June with payment due six months later in December. Because this is a sizable contract for the firm and because the contract is in euros rather than dollars, Plains States is considering several hedging alternatives to reduce the exchange rate risk arising from the sale. To help the firm make a hedging decision you have gathered the following information.
∙ The spot exchange rate is $1.40/euro
∙ The six month forward rate is $1.38/euro
∙ Plains States' cost of capital is 11%
∙ The Euro zone 6-month borrowing rate is 9% (or 4.5% for 6 months)
∙ The Euro zone 6-month lending rate is 7% (or 3.5% for 6 months)
∙ The U.S. 6-month borrowing rate is 8% (or 4% for 6 months)
∙ The U.S. 6-month lending rate is 6% (or 3% for 6 months)
∙ December put options for euro 625,000; strike price $1.42, premium price is 1.5%
∙ Plains States' forecast for 6-month spot rates is $1.43/euro
∙ The budget rate, or the lowest acceptable sales price for this project, is $1,075,000 or $1.35/euro
Refer to Instruction 10.1.What is the cost of a put option hedge for Plains States' euro receivable contract? (Note: Calculate the cost in future value dollars and assume the firm's cost of capital as the appropriate interest rate for calculating future values.)

A)$27,694
B)$26,250
C)euro 27,694
D)euro 26,250

Question 36

In efficient markets,interest rate parity should assure that the costs of a forward hedge and money market hedge should be approximately the same.

Question 37

If the same exchange rate were used to remeasure every line on a financial statement,then there would be no imbalances from remeasuring.

Question 38

The structure of a money market hedge is similar to a forward hedge.The difference is the cost of the money market hedge is determined by the differential interest rates,while the forward hedge is a function of the forward rates quotation.

Question 39

Use the information for the following problem(s).
Plains States Manufacturing has just signed a contract to sell agricultural equipment to Boschin, a German firm, for euro 1,250,000. The sale was made in June with payment due six months later in December. Because this is a sizable contract for the firm and because the contract is in euros rather than dollars, Plains States is considering several hedging alternatives to reduce the exchange rate risk arising from the sale. To help the firm make a hedging decision you have gathered the following information.
∙ The spot exchange rate is $1.40/euro
∙ The six month forward rate is $1.38/euro
∙ Plains States' cost of capital is 11%
∙ The Euro zone 6-month borrowing rate is 9% (or 4.5% for 6 months)
∙ The Euro zone 6-month lending rate is 7% (or 3.5% for 6 months)
∙ The U.S. 6-month borrowing rate is 8% (or 4% for 6 months)
∙ The U.S. 6-month lending rate is 6% (or 3% for 6 months)
∙ December put options for euro 625,000; strike price $1.42, premium price is 1.5%
∙ Plains States' forecast for 6-month spot rates is $1.43/euro
∙ The budget rate, or the lowest acceptable sales price for this project, is $1,075,000 or $1.35/euro
Refer to Instruction 10.1.If Plains States purchases the put option,and the option expires in six months on the same day that Plains States receives the euro 1,250,000,the firm will exercise the put at that time if the spot rate is $1.43/euro.

Question 40

Use the information for the following problem(s).
Plains States Manufacturing has just signed a contract to sell agricultural equipment to Boschin, a German firm, for euro 1,250,000. The sale was made in June with payment due six months later in December. Because this is a sizable contract for the firm and because the contract is in euros rather than dollars, Plains States is considering several hedging alternatives to reduce the exchange rate risk arising from the sale. To help the firm make a hedging decision you have gathered the following information.
∙ The spot exchange rate is $1.40/euro
∙ The six month forward rate is $1.38/euro
∙ Plains States' cost of capital is 11%
∙ The Euro zone 6-month borrowing rate is 9% (or 4.5% for 6 months)
∙ The Euro zone 6-month lending rate is 7% (or 3.5% for 6 months)
∙ The U.S. 6-month borrowing rate is 8% (or 4% for 6 months)
∙ The U.S. 6-month lending rate is 6% (or 3% for 6 months)
∙ December put options for euro 625,000; strike price $1.42, premium price is 1.5%
∙ Plains States' forecast for 6-month spot rates is $1.43/euro
∙ The budget rate, or the lowest acceptable sales price for this project, is $1,075,000 or $1.35/euro
Refer to Instruction 10.1.Plains States could hedge the Euro receivables in the money market.Using the information provided,how much would the money market hedge return in six months assuming Plains States reinvests the proceeds at the U.S.investment rate?

A)$1,250,000
B)$1,724,880
C)$1,674,641
D)$1,207,371

Question 41

The basic advantage of the ________ method of foreign currency translation is that foreign nonmonetary assets are carried at their original cost in the parent's consolidated statement while the most important advantage of the ________ method is that the gain or loss from translation does not pass through the income statement.

A)monetary; current rate
B)temporal; current rate
C)temporal; monetary
D)current rate; temporal

Question 42

The current rate method is the most prevalent method today for the translation of financial statements.

Question 43

The temporal rate method is the most prevalent method today for the translation of financial statements.

Question 44

The current rate method of foreign currency translation gains or losses resulting from remeasurement are carried directly to current consolidated income and thus introduces volatility to consolidated earnings.

Question 45

If a firm's subsidiary is using the local currency as the functional currency,which of the following is NOT a circumstance that could justify the use of a balance sheet hedge?

A)The foreign subsidiary is about to be liquidated, so that the value of its Cumulative Translation Adjustment (CTA)would be realized.
B)The firm has debt covenants or bank agreements that state the firm's debt/equity ratio will be maintained within specific limits.
C)The foreign subsidiary is operating is a hyperinflationary environment.
D)All of the above are appropriate reasons to use a balance sheet hedge.

Question 46

If a firm's balance sheet has an equal amount of exposed foreign currency assets and liabilities and the firm translates by the temporal method,then

A)the net exposed position is called monetary balance.
B)the change of value of liabilities and assets due to a change in exchange rates will be of equal but opposite direction.
C)both A and B are true.
D)none of the above.

Question 47

A balance sheet hedge is the main technique for managing ________.

A)transaction
B)operating
C)translation
D)money market

Question 48

A Canadian subsidiary of a U.S.parent firm is instructed to bill an export to the parent in U.S.dollars.The Canadian subsidiary records the accounts receivable in Canadian dollars and notes a profit on the sale of goods.Later,when the U.S.parent pays the subsidiary the contracted U.S.dollar amount,the Canadian dollar has appreciated 10% against the U.S.dollar.In this example,the Canadian subsidiary will record a

A)10% foreign exchange loss on the U.S. dollar accounts receivable.
B)10% foreign exchange gain on the U.S. dollar accounts receivable.
C)since the Canadian firm is a U.S. subsidiary neither a gain nor loss will be recorded.
D)any gain or loss will be recorded only by the parent firm.

Question 49

The biggest advantage of the current rate method of reporting translation adjustments is the fact that the gain or loss goes directly to the reserve account on the consolidated balance sheet and does not pass through the consolidated income statement.

Question 50

The main technique to minimize translation exposure is called a/an ________ hedge.

A)balance sheet
B)income statement
C)forward
D)translation

Question 51

If the European subsidiary of a U.S.firm has net exposed assets of euro 500,000,and the euro drops in value from $1.40/euro to $1.30/euro the U.S.firm has a translation ________.

A)gain of $50,000
B)loss of $50,000
C)gain of $450,000
D)loss of euro 450,000

Question 52

Under the temporal rate method,specific assets and liabilities are translated at exchange rates consistent with the timing of the item's creation.

Question 53

A balance sheet hedge requires that the amount of exposed foreign currency assets and liabilities

A)have a 2:1 ratio of assets to liabilities.
B)have a 2:1 ratio of liabilities to assets.
C)have a 2:1 ratio of liabilities to equity.
D)be equal.

Question 54

The temporal method of foreign currency translation gains or losses resulting from remeasurement are carried directly to current consolidated income and thus introduces volatility to consolidated earnings.

Question 55

A foreign subsidiary's ________ currency is the currency used in the firm's day-to-day operations.

A)local
B)integrated
C)notational dollar
D)functional

Question 56

Gains or losses caused by translation adjustments when using the current rate method are reported separately on the ________.

A)consolidated statement of cash flow
B)consolidated income statement
C)consolidated balance sheet
D)none of the above

Question 57

Exchange rate imbalances that are passed through the balance sheet affect a firm's reported income,but imbalances transferred to the income statement do not.

Question 58

Under the current rate method,specific assets and liabilities are translated at exchange rates consistent with the timing of the item's creation.

Question 59

The two basic methods for the translation of foreign subsidiary financial statements are the ________ method and the ________ method.

A)current rate; temporal
B)temporal; proper timing
C)current rate; future rate
D)none of the above

Question 60

________ gains and losses are "realized" whereas ________ gains and losses are only "paper."

A)Translation; transaction
B)Transaction; translation
C)Translation; operating
D)None of the above

Question 61

The two methods for the translation of foreign subsidiary financial statements are the current rate and temporal methods.Briefly,describe how each of these methods translates the foreign subsidiary financial statements into the parent company's consolidated statements.Identify when each technique should be used and the major advantage(s)of each.

Question 62

Describe a balance sheet hedge and give at least two examples of when such a hedge could be justified.

Question 63

List and define the three types of foreign exchange exposure presented by your authors.

Question 64

If a European subsidiary of a U.S.firm has net exposed liabilities of euro 500,000,and the euro drops in value from $1.40/euro to $1.30/euro then the U.S.firm has a translation ________.

A)gain of $50,000
B)loss of $50,000
C)gain of $450,000
D)loss of euro 450,000

Question 65

Currency risk management techniques include forward hedges,money market hedges,and option hedges.Draw a diagram showing the possible outcomes of these hedging alternatives for a foreign currency receivable contract.In your diagram,be sure to label the X and Y-axis,the put option strike price,and show the possible results for a money market hedge,a forward hedge,a put option hedge,and an uncovered position.(Note: Assume the forward currency receivable is British pounds and the put option strike price is $1.50/£,the price of the option is $0.04 the forward rate is $1.52/£ and the current spot rate is $1.48/£.)

Question 66

Does foreign currency exchange hedging both reduce risk and increase expected value? Explain,and list several arguments in favor of currency risk management and several against.

Question 67

Using the table below,estimate the net exposure for Souris River Manufacturing of it's wholly-owned Canadian subsidiary.

A)C$40,000
B)C$160,000
C)C$166,000
D)C$200,000

Question 68

If the European subsidiary of a U.S.firm has net exposed assets of euro 500,000,and the euro increases in value from $1.30/euro to $1.35/euro the U.S.firm has a translation ________.

A)gain of $25,000
B)loss of $25,000
C)gain of $525,000
D)loss of euro 525,000

Question 69

If a European subsidiary of a U.S.firm has net exposed liabilities of euro 500,000,and the euro increases in value from $1.30/euro to $1.35/euro then the U.S.firm has a translation ________.

A)gain of $25,000
B)loss of $25,000
C)gain of $525,000
D)loss of euro 525,000