Question 1

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

Accepted Answer

The answer of A Canadian subsidiary of a U.S. parent...

Question 2

A balance sheet hedge is the main technique for managing

Accepted Answer

A balance sheet hedge is used to manage risks related to accounting translation. This technique helps to protect the value of a company's assets and liabilities against changes in currency exchange rates. It involves using financial instruments, such as forwards, options, and swaps, to offset the impact of currency fluctuations on the balance sheet. Balance sheet hedging is particularly important for multinational companies that operate in multiple countries and report financial statements in different currencies.

Question 3

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?

Accepted Answer

A balance sheet hedge is not appropriate when the foreign subsidiary is operating in a hyperinflationary environment.

Question 4

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.

Accepted Answer

The answer of The two methods for the translation of...

Question 5

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

Accepted Answer

A balance sheet hedge involves matching the exposed assets and liabilities in a foreign currency to minimize the impact of currency fluctuations on the company's financial statements.

Question 6

Balance sheet hedge is justified if

Accepted Answer

Balance sheet hedge is often used to mitigate the potential adverse impact of currency fluctuations on the assets and liabilities of a foreign subsidiary. If the foreign subsidiary country has high country risk and is facing potential hyperinflation, the balance sheet hedge can be justified as it will protect the subsidiary's assets and liabilities from currency fluctuations, and ensure their solvency. The other options do not provide sufficient justification for the use of balance sheet hedge.

Question 7

Balance sheet hedge requires an equal amount of exposed foreign currency assets and liabilities. A German company's subsidiary in Poland has Zloty as its functional currency. To hedge its translational exposure the company should

Accepted Answer

The answer of Balance sheet hedge requires an equal amount...

Question 8

Most managers would prefer to be protected against transaction rather than translation losses because

Accepted Answer

Transaction losses are realized cash losses and directly impact the company's financial position. On the other hand, translation losses only affect the reported financial statements and do not impact the company's cash position. Hence, most managers would prefer to be protected against transaction losses.

Question 9

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

Accepted Answer

The U.S. firm gains because the euro liabilities are now cheaper to settle in dollars. The change in exchange rate from $1.40 to $1.30 means the liabilities decrease by $0.10 per euro, resulting in a gain of $50,000 (500,000 euros * $0.10).

Question 10

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

Accepted Answer

A translation loss occurs when the exchange rate of the foreign currency strengthens against the U.S. dollar. In this case, the euro has increased in value from $1.30/euro to $1.35/euro, meaning the U.S. dollar is weaker against the euro. Therefore, the U.S. firm would have a translation loss on the net exposed liabilities of euro 500,000. The loss would be $25,000 ($1.35 - $1.30) x 500,000.

Question 11

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

Accepted Answer

In order to implement a balance sheet hedge, the amount of exposed foreign currency assets and liabilities must be equal. This is because the goal of a balance sheet hedge is to minimize the impact of exchange rate fluctuations on the value of a company's assets and liabilities. By having equal amounts of exposed foreign currency assets and liabilities, any gain or loss due to exchange rate fluctuations will be partially offset by the opposite impact on the corresponding liability or asset.

Question 12

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

Accepted Answer

The U.S. firm experiences a translation gain because the euro has appreciated against the dollar. The increase in value is calculated as (1.35 - 1.30) * 500,000 = $25,000.

Question 13

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

Accepted Answer

When a firm uses the temporal method and has equal foreign currency assets and liabilities, the net exposed position is indeed called a monetary balance, and any changes in exchange rates will affect the value of assets and liabilities equally but in opposite directions, thus both A and B are true.

Question 14

Using the table below, estimate the net exposure for Souris River Manufacturing of it's wholly-owned Canadian subsidiary. Souris River Manufacturing (Canada)
Balance Sheet December 31 200X

Accepted Answer

To estimate the net exposure for Souris River Manufacturing of its wholly-owned Canadian subsidiary, we need to look at the total assets and liabilities in Canadian dollars. 
From the balance sheet, we can see that the total assets are C$300,000 and the total liabilities are C$134,000. Therefore, the net exposure (total assets - total liabilities) is C$166,000. So the best choice is C.

Question 15

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

Accepted Answer

The answer of Describe a balance sheet hedge and give...

Question 16

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

Accepted Answer

In accounting, realized gains and losses refer to gains and losses that have occurred due to an actual transaction. For example, if a company sells a product for a higher price than it was purchased, it has realized a gain. On the other hand, paper gains and losses refer to gains and losses that exist on paper but have not been realized. For example, if a company owns stock that has increased in value but has not yet sold it, it has a paper gain.

Translation gains and losses occur due to the conversion of foreign currency transactions into the reporting currency, whereas transaction gains and losses occur due to actual transactions such as sales or purchases. Therefore, the correct answer is B, Transaction; translation.

Question 17

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

Accepted Answer

The net exposed assets of the European subsidiary are euro 500,000, and the drop in the euro value from $1.40/euro to $1.30/euro represents a 7.14% decrease. Therefore, the subsidiary's assets are now worth $650,000 (500,000 x 1.30). If the U.S. firm were to translate these assets back into dollars at the current exchange rate of $1.30/euro, they would now be worth $845,000 (650,000 / 0.77). That means the U.S. firm has a loss of $50,000 ($845,000 - $895,000).

Quiz 10: Translation Exposure