Deck 12: Managing Economic Exposure and Translation Exposure

Question 1

Depreciation of the euro relative to the U.S.dollar will cause a U.S.-based multinational firm's reported earnings (from the consolidated income statement)to _______.  If a firm desired to protect against this possibility,it could stabilize its reported earnings by _______ euros forward in the foreign exchange market.

A) be reduced;purchasing
B) be reduced;selling
C) increase;selling
D) increase;purchasing

Answer 1

B

Question 2

Sycamore (a U.S.firm)has no subsidiaries and presently has sales to Mexican customers amounting to MXP98 million,while its pesodenominated expenses amount to MXP41 million.  If it shifts its material orders from its Mexican suppliers to U.S.suppliers,it could reduce pesodenominated expenses by MXP12 million and increase dollardenominated expenses by $800,000.  This strategy would _______ the Sycamore'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

Answer 2

D

Question 3

Assume a U.S.firm uses a forward contract to hedge all of its translation exposure.  Also assume that the firm underestimated what its foreign earnings would be.  Assume that the foreign currency depreciated over the year.  The firm would generate a translation _______,which would be _______ than the gain generated by the forward contract.

A) loss;smaller
B) loss;larger
C) gain;larger
D) gain;smaller

Answer 3

B

Question 4

Any restructuring of operations that _______ the difference between a foreign currency's inflows and outflows may _______ economic exposure.

A) reduces;increase
B) increases;reduce
C) reduces;reduce
D) A and B
E) none of the above

Question 5

If a U.S.firm's expenses are more susceptible to exchange rate movements than revenue,the firm will _______ if the dollar _______.

A) benefit;weakens
B) be unaffected;weakens
C) be unaffected;strengthens
D) benefit;strengthens

Question 6

Assume that a Japanese car manufacturer exports cars to U.S.dealerships,which are priced in yen.The demand for those cars declines when the yen is strong.The manufacturer also produces some cars in the U.S.with U.S.materials and those cars are priced in dollars.The manufacturer could reduce its economic exposure by:

A) closing down most of its plants in the U.S.
B) producing more automobiles in the U.S.
C) relying completely on Japanese suppliers for its parts.
D) pricing its exports in dollars.

Question 7

__________ represents any impact of exchange rate fluctuations on a firm's future cash flows.

A) Translation exposure
B) Economic exposure
C) Transaction exposure
D) None of the above

Question 8

An effective for an MNC to assess its economic exposure is to look at the firm's:

A) income statement.
B) liquidity.
C) retained earnings.
D) level of stochholder's equity.

Question 9

Which of the following firms is not exposed to translation exposure

A) firm X, with a fully owned subsidiary that periodically remits earnings generated in Great Britain to the U.S.-based parent.
B) firm Y, with a fully owned subsidiary that periodically generates foreign losses in Sweden;the parent covers at least some of these losses.
C) firm Z, with a fully owned subsidiary that generates substantial earnings in Germany;the subsidiary never remits earnings but reinvests them in Germany.
D) all of the above firms are exposed to translation exposure.

Question 10

Whitewater Co.is a U.S.company with sales to Canada amounting to C$8 million.  Its cost of goods sold 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 "earnings before taxes" would _______ if the Canadian dollar appreciates.

A) increase;increase
B) decrease;increase
C) decrease;decrease
D) increase;decrease
E) increase;be unaffected

Question 11

It is generally least difficult to effectively hedge various types of:

A) translation exposure.
B) transaction exposure.
C) economic exposure.
D) A and C

Question 12

If the Singapore dollar appreciates against the U.S.dollar over this year,the consolidated earnings of a U.S.company with a subsidiary in Singapore will be ____ as a result of the exchange rate movement.

A) negative
B) adversely affected
C) favorably affected
D) unaffected

Question 13

Rockford 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 pounddenominated 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) A and B
D) None of the above

Question 14

Laketown 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

Question 15

A perfect hedge (full coverage)on translation exposure can usually be achieved when:

A) using the money market hedge.
B) using the forward hedge.
C) using the futures hedge.
D) none of the above, since a perfect hedge is nearly impossible.

Question 16

With regard to hedging translation exposure,translation losses _______;and gains on forward contracts used to hedge translation exposure _______.

A) are not tax deductible;are taxed
B) are tax deductible;are taxed
C) are not tax deductible;are not taxed
D) are tax deductible;are not taxed

Question 17

Which of the following is an example of economic exposure but not an example of transaction exposure

A) An increase in the dollar's value hurts a U.S. firm's domestic sales because foreign competitors are able to increase their sales to U.S. customers.
B) An increase in the pound's value increases the U.S. firm's cost of British pound payables.
C) A decrease in the peso's value decreases a U.S. firm's dollar value of peso receivables.
D) A decrease in the Swiss franc's value decreases the dollar value of interest payments on a Swiss deposit sent to a U.S. firm by a Swiss bank.

Question 18

Springfield Co.,based in the U.S.,has a cost of goods sold attributable to foreign material orders that exceeds its foreign revenue.  All foreign transactions are denominated in the foreign currency of concern.  This firm would _______ a stronger dollar and would _______ a weaker dollar.

A) benefit from;be unaffected by
B) benefit from;be adversely affected by
C) be unaffected by;be adversely affected by
D) be unaffected by;benefit from
E) benefit from;benefit from

Question 19

Wisconsin Inc.conducts business in Zambia.Years ago,Wisconsin established a subsidiary in Zambia that has consistently generated very large profits denominated in Zambian kwacha.Wisconsin wishes to restructure its operations to reduce economic exposure.Which of the following is not a feasible way of accomplishing this

A) increase Zambian supply orders.
B) increase Zambian sales.
C) restructure debt to increase debt payments in Zambia.
D) reduce Zambian sales.

Question 20

If a firm is subject to ______,then it must be subject to translation exposure.

A) transaction exposure
B) economic exposure
C) A and B
D) none of the above

Question 21

U.S.-based MNCs invoicing in Asian currencies and incurring expenses in Asian currencies were probably less affected by weakness of Asian currencies than U.S.-based MNCs that invoice in Asian currencies but do not incur expenses in those currencies.

Question 22

Long-term forward contracts are a possible way to hedge the distant sale of fixed assets in foreign countries,but they may not be available for many emerging market currencies.

Question 23

An MNC is attempting to reduce its economic exposure by financing a portion of its business with loans in the foreign currency.If the foreign currency weakens,the MNC will need _______ of the foreign currency to cover the loan payment,while the MNC's foreign currency revenues will convert to _______ dollars.

A) more;fewer
B) more;more
C) less;fewer
D) less;more

Question 24

______________ is not a limitation of hedging translation exposure.

A) Inaccurate stock price forecasts
B) Inadequate forward contracts for some currencies
C) Accounting distortions
D) Increased transaction exposure

Question 25

A foreign subsidiary with more susceptible expenses than revenue to exchange rate movements will be favorably affected by an appreciation of the foreign currency.

Question 26

U.S.firms can attempt to hedge their translation exposure of their European subsidiaries with a forward purchase of euros.

Question 27

An MNC expects to sell fixed assets it utilizes in Europe in the distant future.In order to hedge the sale of these assets in the distant future,the MNC could create a(n)___________ that _________ the expected value of the assets in the future.

A) asset;matches
B) asset;exceeds
C) liability;matches
D) liability;is less than

Question 28

Assume that an MNC's cash flows are positively related to the movements in a foreign currency.If the MNC expects the foreign currency to weaken,it could purchase the currency forward to reduce its degree of economic exposure.

Question 29

Managing economic exposure is generally perceived to be __________ managing transaction exposure.

A) more difficult
B) less difficult
C) just as difficult as
D) none of the above

Question 30

In general,it is more difficult to effectively hedge economic or translation exposure than to hedge transaction exposure.

Question 31

As opposed to transaction exposure,managing economic exposure involves developing a ________ solution.

A) short-term
B) long-term
C) immediate
D) none of the above

Question 32

To hedge translation exposure,MNCs could _______ that their foreign subsidiaries receive as earnings to create a cash outflow in the currency to offset the earnings received in that currency.

A) purchase the currency forward
B) sell the currency forward
C) purchase futures contracts of the currency
D) A or C
E) none of the above

Question 33

A limitation of hedging translation exposure is that translation losses are not tax deductible,whereas gains on forward contracts used to hedge translation exposure are taxed.

Question 34

________ exposure occurs when an MNC translates each subsidiary's financial data to its home currency for consolidated financial statements.

A) Translation
B) Transaction
C) Economic
D) None of the above

Question 35

Hedging translation exposure with forward contracts can backfire if the currency being hedged depreciates.

Question 36

The translation gain (or loss)is simply a paper gain (or loss).Conversely,the gain (or loss)resulting from a hedge strategy is a real gain (or loss).

Question 37

Cierra,Inc.is attempting to assess its degree of economic exposure in euros.In order to do so,it has applied regression analysis to determine whether the percentage change in its total cash flow is related to the percentage change in the euro.A _______ and statistically significant slope coefficient resulting from this analysis implies that the cash flows are _________ related to the percentage changes in the euro.

A) positive;positively
B) positive;negatively
C) negative;positively
D) B and C
E) none of the above

Question 38

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 the above

Question 39

Translation losses are __________,while gains on forward contracts used to hedge translation exposure are _______.

A) tax deductible;not taxed
B) not tax deductible;not taxed
C) not tax deductible;taxed
D) tax deductible;taxed

Question 40

All MNCs are subject to translation exposure.

Question 41

Transaction exposure results when an MNC translates each subsidiary's financial data to its home currency for consolidated financial statements.

Question 42

The management of economic exposure is normally focused completely on transactions that will occur in the next three months.

Question 43

Although forward contracts may reduce translation exposure at the expense of increasing transaction exposure,they are sometimes used to hedge translation exposure.