Consider an MNC based in Canada with manufacturing activities in Japan.The result of a change in the ¥/$ exchange rate on the assets and liabilities of the consolidated balance sheet is: Ignoring transaction exposure in the yen,the translation exposure will indicate a possible need for a "balance sheet hedge" of:
A)¥200,000,000 more liabilities denominated in yen
B)¥200,000,000 less assets denominated in yen
C)a or b
D)none of these

Question

Consider an MNC based in Canada with manufacturing activities in Japan.The result of a change in the ¥/$ exchange rate on the assets and liabilities of the consolidated balance sheet is:  Ignoring transaction exposure in the yen,the translation exposure will indicate a possible need for a "balance sheet hedge" of:
A)¥200,000,000 more liabilities denominated in yen 
B)¥200,000,000 less assets denominated in yen 
C)a or b 
D)none of these

Quizplus · Accepted Answer

A balance sheet hedge involves taking actions to mitigate the impact of changes in exchange rates on an MNC's consolidated balance sheet. Ignoring transaction exposure, a change in exchange rates would result in either a decrease in the value of yen-denominated assets or an increase in the value of yen-denominated liabilities. Thus, the best choice would be either to reduce yen-denominated assets by ¥200,000,000 or increase yen-denominated liabilities by ¥200,000,000 to offset the potential negative impact of a weaker yen. Therefore, the correct answer is choice C.

Consider an MNC Based in Canada with Manufacturing Activities in Japan.The