Question 1

Firms that attempt to reduce risk and beat the market simultaneously may end up with

Accepted Answer

Attempting to beat the market often involves taking on more risk, so firms attempting to do so may end up with more risk rather than less.

Question 2

argument that favors centralization of foreign risk management is the ability to take advantage of the portfolio effect through ________.

Accepted Answer

Exposure netting allows a centralized approach to manage foreign risks by offsetting exposures in different currencies, taking advantage of the portfolio effect to reduce overall risk.

Question 3

The following information is to be used in answering questions 16?17.
In 1995, Ajax Manufacturing's German subsidiary has the following balance sheet:
 $$\begin{array}{l}
\begin{array} { l l l l } 
\text { Cash, rrarketable } & \text { DM 250,000 } & \text { Current liabilities } & \text { DM 750,000 } \
\text { securities } & 1,000,000 & \text { Long-tern debt } & 3,400,000 \
\text { Accourits receivable } & 2,700,000 & \text { Equity } & 4,900,000 \
\text { Irventory fat rrarket. } & 5,100,000 & & \
\text { Fixed Assets } & -----7 &\text{total liabilities} & -----\
& \text { DM } 9,050,000 & \text { plus equity } & \text { DM } 9,050,000
\end{array}\
\text { Total assets }
\end{array}$$ Suppose the DM appreciates from $0.70 to $0.76 during the period.
-Under the current rate method, what is Ajax's translation gain (loss).?

Accepted Answer

Under the current rate method, all assets and liabilities are translated at the current exchange rate. The translation gain or loss is reported in the equity section of the balance sheet as part of accumulated other comprehensive income. The specific gain or loss amount (e.g., $294,000) would depend on the changes in exchange rates and the specific amounts of assets and liabilities being translated. Without specific numbers regarding exchange rates and the values of assets and liabilities, the correct answer cannot be determined through calculation here, but the concept is that translation gains or losses reflect the impact of exchange rate changes on the company's financial statements.

Question 4

current standard for measuring translation exposure is

Accepted Answer

FASB 52 (Financial Accounting Standards Board Statement No. 52) provides the current standard for measuring translation exposure. This statement outlines the accounting treatment and reporting of foreign currency transactions in financial statements, including the translation of financial statements of foreign subsidiaries. It requires the use of the functional currency approach, which involves determining the primary currency in which a foreign subsidiary conducts its business and translating its financial statements into the reporting currency of the parent company. This minimizes the effects of translation exposure on the financial statements of the parent company.

Question 5

Under FASB 52, most financial statements must be translated using the

Accepted Answer

Under FASB 52, the most common method for translating financial statements is the current rate method, which uses the current exchange rate to translate all balance sheet items (both monetary and non-monetary) and the average exchange rate for the year to translate income statement items.

Question 6

____________ exposure results from the possibility of incurring a gain or loss related to a sale or purchase already entered into and denominated in another currency.

Accepted Answer

This is specifically referring to the risk involved in a transaction denominated in a foreign currency, where the exchange rate may have fluctuated between the time the transaction was initiated and the time it is settled. Translation exposure refers to the impact of currency fluctuations on a company's consolidated financial statements, operating exposure relates to the impact on future cash flows, and accounting exposure is the impact of currency fluctuations on a company's accounting standards or requirements.

Question 7

major difference between the temporal method and the monetary/nonmonetary method is that

Accepted Answer

The major difference between the two methods is the treatment of inventory. Under the monetary/nonmonetary method, inventory is always translated at the historical rate. However, under the temporal method, inventory may be translated at the current rate if it is shown on the balance sheet at market values. The other options do not accurately describe the differences between the two methods.

Question 8

is possible for transaction exposure to be positive and translation exposure in the same currency to be

Accepted Answer

It is possible for transaction exposure to be positive and translation exposure in the same currency to be negative.

Transaction exposure arises from the risk of fluctuating currency values on future cash flows from contractual agreements, and can result in a positive or negative impact on the company's financial position.

Translation exposure arises from the risk of fluctuations in currency values on the translation of financial statements from a foreign currency to the home currency. When the value of the foreign currency decreases in relation to the home currency, translation exposure is negative. Therefore, it is possible to have a positive transaction exposure and negative translation exposure in the same currency.

Question 9

___________ a certain currency exposure means establishing an offsetting currency position so that the gain or loss from the exposure on the original currency is exactly offset buy the gain or loss from the currency hedge.

Accepted Answer

Hedging is the process of managing risks by establishing an offsetting position in a related security or asset, such as a currency hedge. This is done to minimize the potential loss or gain from a particular exposure. Therefore, hedging is the best choice to correctly complete the given statement.

Question 10

Hedging cannot provide protection against ________ exchange rate changes.

Accepted Answer

Hedging is a strategy used to protect against unforeseen changes in exchange rates. Expected exchange rate changes are typically already factored into financial strategies, making hedging unnecessary for these anticipated movements.

Question 11

Which of the following is a basic hedging technique during depreciation?

Accepted Answer

Reducing levels of local currency cash and marketable securities is a basic hedging technique during depreciation because it minimizes exposure to the depreciating currency.

Question 12

The following information is to be used in answering questions 16?17.
In 1995, Ajax Manufacturing's German subsidiary has the following balance sheet:
 $$\begin{array}{l}
\begin{array} { l l l l } 
\text { Cash, rrarketable } & \text { DM 250,000 } & \text { Current liabilities } & \text { DM 750,000 } \
\text { securities } & 1,000,000 & \text { Long-tern debt } & 3,400,000 \
\text { Accourits receivable } & 2,700,000 & \text { Equity } & 4,900,000 \
\text { Irventory fat rrarket. } & 5,100,000 & & \
\text { Fixed Assets } & -----7 &\text{total liabilities} & -----\
& \text { DM } 9,050,000 & \text { plus equity } & \text { DM } 9,050,000
\end{array}\
\text { Total assets }
\end{array}$$ Suppose the DM appreciates from $0.70 to $0.76 during the period.
-Under the monetary/non-monetary method, what is Ajax's translation gain (loss)?

Accepted Answer

The answer of The following information is to be used...

Question 13

The following information is to be used in answering questions 16?17.
In 1995, Ajax Manufacturing's German subsidiary has the following balance sheet:
 $$\begin{array}{l}
\begin{array} { l l l l } 
\text { Cash, rrarketable } & \text { DM 250,000 } & \text { Current liabilities } & \text { DM 750,000 } \
\text { securities } & 1,000,000 & \text { Long-tern debt } & 3,400,000 \
\text { Accourits receivable } & 2,700,000 & \text { Equity } & 4,900,000 \
\text { Irventory fat rrarket. } & 5,100,000 & & \
\text { Fixed Assets } & -----7 &\text{total liabilities} & -----\
& \text { DM } 9,050,000 & \text { plus equity } & \text { DM } 9,050,000
\end{array}\
\text { Total assets }
\end{array}$$ Suppose the DM appreciates from $0.70 to $0.76 during the period.
-Under the current/noncurrent method, what is Ajax's translation gain (loss).?

Accepted Answer

The answer of The following information is to be used...

Question 14

__________ involves offsetting exposures in one currency with exposures in the same or another currency, where exchange rates are expected to move in such a way that losses on the first exposed position should be offset by gains on the second currency exposure and vice versa.

Accepted Answer

Exposure netting involves offsetting exposures in one currency with exposures in the same or another currency, where exchange rates are expected to move in such a way that losses on the first exposed position should be offset by gains on the second currency exposure and vice versa.Forward contract, currency option, and money-market hedge do not necessarily involve offsetting currency exposures in the same or another currency.

Question 15

a forward market hedge, a company that is long a foreign currency will _______ the foreign currency forward, whereas a company that is short a foreign currency will _______ the currency forward.

Accepted Answer

A company that is long a foreign currency will sell the foreign currency forward to hedge against a potential decrease in its value, while a company that is short a foreign currency will buy the currency forward to hedge against a potential increase in its value.

Question 16

Translation exposure reflects the exposure of a company's

Accepted Answer

Translation exposure refers to the impact of currency movements on a company's consolidated financial statements, especially when foreign operations' financials are converted to the parent company's reporting currency.

Question 17

basic hedging strategy involves

Accepted Answer

The basic hedging strategy involves reducing exposure to currency fluctuations by reducing soft currency assets and hard currency liabilities. This can be achieved by selling off soft currency assets and repaying hard currency liabilities, or by taking out hard currency loans to fund investments or pay off soft currency debts. By reducing exposure to currency fluctuations in this way, companies can help protect themselves from potentially damaging fluctuations in exchange rates. Choice A and B involve increasing exposure to currency fluctuations, while choice D involves taking on additional risk by lending hard currencies.

Question 18

The following information is to be used in answering questions 16?17.
In 1995, Ajax Manufacturing's German subsidiary has the following balance sheet:
 $$\begin{array}{l}
\begin{array} { l l l l } 
\text { Cash, rrarketable } & \text { DM 250,000 } & \text { Current liabilities } & \text { DM 750,000 } \
\text { securities } & 1,000,000 & \text { Long-tern debt } & 3,400,000 \
\text { Accourits receivable } & 2,700,000 & \text { Equity } & 4,900,000 \
\text { Irventory fat rrarket. } & 5,100,000 & & \
\text { Fixed Assets } & -----7 &\text{total liabilities} & -----\
& \text { DM } 9,050,000 & \text { plus equity } & \text { DM } 9,050,000
\end{array}\
\text { Total assets }
\end{array}$$ Suppose the DM appreciates from $0.70 to $0.76 during the period.
-Under the temporal method, what is Ajax's translation gain (loss).?

Accepted Answer

The answer of The following information is to be used...

Question 19

________ involves simultaneously borrowing and lending activities in two different currencies to lock in the currency's value of a future foreign currency cash flow.

Accepted Answer

The described activity is known as a money-market hedge, which involves borrowing the foreign currency needed to finance the cash flow in that currency and lending the domestic currency obtained from exchanging the foreign currency. This strategy aims to eliminate exchange rate risk by creating a natural hedge through offsetting cash flows in opposite currencies. Forward contracts, currency collars, and currency options are other methods of managing exchange rate risk, but they do not involve simultaneous borrowing and lending activities in different currencies.

Question 20

Which one of the following would NOT be a suggested element for an effective exposure management strategy?

Accepted Answer

Avoiding the use of forward contracts is not a suggested element for an effective exposure management strategy. Forward contracts can be a useful tool for managing exposure to currency fluctuations. The other options (determining types of exposure, formulating corporate objectives, and ensuring consistency with maximizing shareholder value) are all important elements of an effective exposure management strategy.

Quiz 10: Measuring and Managing Translation and Transaction Exposure

Firms that attempt to reduce risk and beat the market simultaneously may end up with

argument that favors centralization of foreign risk management is the ability to take advantage of the portfolio effect through ________.

current standard for measuring translation exposure is

Under FASB 52, most financial statements must be translated using the

____________ exposure results from the possibility of incurring a gain or loss related to a sale or purchase already entered into and denominated in another currency.

major difference between the temporal method and the monetary/nonmonetary method is that

is possible for transaction exposure to be positive and translation exposure in the same currency to be

___________ a certain currency exposure means establishing an offsetting currency position so that the gain or loss from the exposure on the original currency is exactly offset buy the gain or loss from the currency hedge.

Hedging cannot provide protection against ________ exchange rate changes.

Which of the following is a basic hedging technique during depreciation?

__________ involves offsetting exposures in one currency with exposures in the same or another currency, where exchange rates are expected to move in such a way that losses on the first exposed position should be offset by gains on the second currency exposure and vice versa.

a forward market hedge, a company that is long a foreign currency will _ the foreign currency forward, whereas a company that is short a foreign currency will _ the currency forward.

Translation exposure reflects the exposure of a company's

basic hedging strategy involves

________ involves simultaneously borrowing and lending activities in two different currencies to lock in the currency's value of a future foreign currency cash flow.

Which one of the following would NOT be a suggested element for an effective exposure management strategy?