Question 1

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

Accepted Answer

D

Question 2

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

Accepted Answer

Translation losses are not tax deductible because they are unrealized accounting losses, while gains on forward contracts used to hedge translation exposure are considered taxable income.

Question 3

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 ____.

Accepted Answer

D

Question 4

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?

Accepted Answer

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

Question 5

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

Accepted Answer

If operations are restructured to reduce the difference between a foreign currency's inflows and outflows, it would result in reducing economic exposure. If operations are restructured to increase the difference between a foreign currency's inflows and outflows, it would result in increasing economic exposure. Therefore, option A and B are incorrect. Option C is correct as it suggests reducing economic exposure.

Question 6

Whitewater Co. is a U.S. company with sales to Canada amounting to C$8 million. Its cost of materials 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 cash flows would ____ if the Canadian dollar appreciates.

Accepted Answer

If the Canadian dollar appreciates, it means each Canadian dollar is worth more U.S. dollars. As a result, Whitewater's sales revenue of C$8 million would be worth more U.S. dollars, leading to an increase in earnings before interest and taxes. However, on the other side, the cost of materials and interest expense in Canadian dollars would be worth more U.S. dollars, leading to a decrease in cash flows. This means the answer choice D, increase in earnings before interest and taxes and decrease in cash flows, is the best option.

Question 7

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

Accepted Answer

Transaction exposure refers to the risk that arises from fluctuations in exchange rates between the time a company enters into a transaction and the time it settles the transaction. This type of exposure can be effectively hedged through various methods such as forward contracts, option contracts, and currency swaps. On the other hand, translation exposure and economic exposure are more difficult to hedge as they involve broader risks such as changes in exchange rates affecting the values of a company's assets, liabilities, and earnings over time.

Question 8

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:

Accepted Answer

By producing more automobiles in the U.S. with U.S. materials and pricing them in dollars, the manufacturer can reduce its economic exposure as the demand for those cars will not be affected by currency fluctuations. This would also provide a natural hedge against currency fluctuations, as the revenue earned in dollars will offset any losses incurred due to a strong yen. Closing down U.S. plants or relying completely on Japanese suppliers would not address the issue of currency risk, while pricing exports in dollars could lead to a loss of competitiveness if the dollar appreciates against the yen.

Question 9

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

Accepted Answer

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

Question 10

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.

Accepted Answer

Depreciation of the euro means that when earnings in euros are converted to U.S. dollars, they will be worth less, reducing reported earnings. To hedge against this, the firm could sell euros forward to lock in the current exchange rate.

Question 11

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

Accepted Answer

The answer of If a U.S. firm's expenses are more...

Question 12

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

Accepted Answer

Economic exposure refers to the impact of currency fluctuations on a firm's overall value, while transaction exposure refers to the impact of currency fluctuations on a specific transaction. Option A shows the impact of currency fluctuations on a U.S. firm's domestic sales, which affects the firm's overall value and is an example of economic exposure. The other options show the impact of currency fluctuations on specific transactions, making them examples of transaction exposure.

Question 13

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

Accepted Answer

The income statement shows the revenue and costs of a company over a certain period of time. By analyzing the income statement, an MNC can assess its economic exposure by identifying how changes in exchange rates impact revenue and costs. For example, if a firm has significant revenue in a foreign currency but incurs most of its costs in a different currency, a change in exchange rates could significantly impact profitability. Therefore, reviewing the income statement is an effective way to assess economic exposure. Liquidity, retained earnings, and stockholders' equity are important financial metrics but they do not directly measure economic exposure.

Question 14

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.

Accepted Answer

The answer of Assume a U.S. firm uses a forward...

Question 15

Springfield Co., based in the U.S., has a cost from orders of foreign material 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.

Accepted Answer

Springfield Co. would benefit from a stronger dollar because it would reduce the cost of foreign materials. Conversely, a weaker dollar would increase the cost of foreign materials, adversely affecting the company.

Question 16

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

Accepted Answer

Economic exposure represents any impact of exchange rate fluctuations on a firm's future cash flows, which may result from changes in the competitive position of a firm or changes in the demand for its products due to currency fluctuations. Translation exposure refers to the impact of exchange rate fluctuations on the financial statements of a firm, and transaction exposure refers to the impact of currency fluctuations on a specific transaction. None of the above would not be a correct answer as all three options relate to exchange rate impacts on a firm.

Question 17

If a firm does not have foreign subsidiaries, it is not subject to ____.

Accepted Answer

Translation exposure refers to the potential impact of currency fluctuations on a firm's financial statements, particularly when translating the financial statements of foreign subsidiaries back into the home currency. If a firm does not have foreign subsidiaries, it does not have translation exposure. Transaction exposure and economic exposure both refer to the potential impact of currency fluctuations on a firm's operations, and can arise even if a firm does not have foreign subsidiaries.

Question 18

Sycamore (a U.S. firm) has no subsidiaries and presently has sales to Mexican customers amounting to MXP98 million, while its peso-denominated expenses amount to MXP41 million. If it shifts its material orders from its Mexican suppliers to U.S. suppliers, it could reduce peso-denominated expenses by MXP12 million and increase dollar-denominated 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.

Accepted Answer

The answer of Sycamore (a U.S. firm) has no subsidiaries...

Question 19

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.

Accepted Answer

If the Singapore dollar appreciates against the U.S. dollar, it means that it can buy more U.S. dollars. Therefore, when the U.S. company's Singapore subsidiary converts its earnings in Singapore dollars to U.S. dollars, it will receive more U.S. dollars than before. This will increase the consolidated earnings of the U.S. company, so it will be favorably affected.

Question 20

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 pound-denominated loans from British banks. Which of the following is true? (Assume that the amount of products to be sold is guaranteed by contracts.)

Accepted Answer

The dollar value of sales is lower if the pound depreciates against the dollar, as the revenue in pounds will convert to fewer dollars.

Quiz 12: Managing Economic Exposure and Translation Exposure

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

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

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 .

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