Question 1

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

Accepted Answer

The answer of US firms can attempt to hedge their...

Question 2

In practice, a perfect hedge (full coverage) on translation exposure can usually be achieved when:

Accepted Answer

The answer of In practice, a perfect hedge (full coverage)...

Question 3

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.

Accepted Answer

Long-term forward contracts may not be available for many emerging market currencies, making it difficult to hedge the distant sale of fixed assets in foreign countries.

Question 4

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).

Accepted Answer

Translation gains or losses arise from the conversion of financial statements of foreign operations into the reporting currency and are not realized through actual cash transactions, making them "paper" gains or losses. Conversely, gains or losses from hedge strategies involve actual financial transactions to mitigate risk, resulting in real gains or losses that affect cash flow.

Question 5

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

Accepted Answer

The answer of With regard to hedging translation exposure, translation...

Question 6

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

Accepted Answer

Economic exposure affects the firm's future cash flows and profitability, which are reflected in the income statement.

Question 7

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

Accepted Answer

If the Singapore dollar appreciates against the euro, the earnings from the Singapore subsidiary, when converted back to euros, will be higher, thus favourably affecting the consolidated earnings of the euro company.

Question 8

Whitewater ltd. is a UK 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 pound value of Whitewater's 'earnings before interest and taxes' would ____ if the Canadian dollar appreciates; the pound value of Whitewater's "earnings before taxes" would ____ if the Canadian dollar appreciates.

Accepted Answer

The answer of Whitewater ltd. is a UK company with...

Question 9

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

Accepted Answer

Increasing Zambian sales would increase economic exposure rather than reduce it, as it would further tie the company's performance to the Zambian economy and currency fluctuations.

Question 10

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

Accepted Answer

The management of economic exposure involves identifying and managing risks associated with future cash flows that are exposed to fluctuations in exchange rates. This can involve managing risks associated with transactions that may occur beyond a three-month time horizon, such as long-term investments, contracts, or strategic decisions.

Question 11

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

Accepted Answer

If the currency being hedged depreciates, then the company will have to buy the currency at the higher forward rate, resulting in losses instead of gains. Therefore, hedging with forward contracts can backfire if the currency being hedged depreciates.

Question 12

Assume a UK 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.

Accepted Answer

The answer of Assume a UK firm uses a forward...

Question 13

Cierra ltd 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.

Accepted Answer

A positive and statistically significant slope coefficient implies that the cash flows are positively related to the percentage changes in the euro.

Question 14

Assume that a Japanese car manufacturer exports cars to UK 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 UK with UK materials and those cars are priced in pounds. The manufacturer could reduce its economic exposure by:

Accepted Answer

Producing more automobiles in the UK would reduce the manufacturer's economic exposure to yen fluctuations, as costs and revenues would be more aligned with the local currency, pounds.

Question 15

Which of the following firms is not exposed to translation exposure?

Accepted Answer

The answer of Which of the following firms is not...

Question 16

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:

Accepted Answer

If cash inflows match cash outflows in each foreign currency, this means that the MNC is not exposed to economic risk since any exchange rate movement will have an equal impact on both revenues and costs. By restructuring their operations to shift the sources of costs or revenues to other locations, MNCs can achieve this balance and reduce their economic exposure. Therefore, option C is the best choice.

Quiz 12: Managing Economic Exposure and Translation Exposure