Managing Economic Exposure and Translation Exposure: Chapter 12 Exam Study Guide, Exams of Business Economics

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Translation Exposure-Chapter 12

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Translation Exposure-Chapter 12

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1. 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. a. be reduced; purchasing b. be reduced; selling c. increase; selling d. increase; purchasing

ANS: B PTS: 1

2. 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. a. benefit from; be unaffected by b. benefit from; be adversely affected by c. be unaffected by; be adversely affected by d. be unaffected by; benefit from e. benefit from; benefit from

ANS: B PTS: 1

3. 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. a. increase; increase b. decrease; increase c. decrease; decrease d. increase; decrease e. increase; be unaffected

ANS: D PTS: 1

4. 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. a. reduce; high b. reduce; low c. increase; low d. increase; high

ANS: D PTS: 1

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

Translation Exposure-Chapter 12

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10. It is generally least difficult to effectively hedge various types of: a. translation exposure. b. transaction exposure. c. economic exposure. d. A and C

ANS: B PTS: 1

11. With regard to hedging translation exposure, translation losses , and gains on forward contracts used to hedge translation exposure. a. are not tax deductible; are taxed b. are tax deductible; are taxed c. are not tax deductible; are not taxed d. are tax deductible; are not taxed

ANS: A PTS: 1

12. If a firm does not have foreign subsidiaries, it is not subject to. a. transaction exposure b. economic exposure c. A and B d. translation exposure

ANS: D PTS: 1

13. 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. a. negative b. adversely affected c. favorably affected d. unaffected

ANS: C PTS: 1

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. a. loss; smaller b. loss; larger c. gain; larger d. gain; smaller

ANS: B PTS: 1

15. A perfect hedge (full coverage) on translation exposure can usually be achieved when: a. using the money market hedge. b. using the forward hedge. c. using the futures hedge. d. none of the above, since a perfect hedge is nearly impossible.

ANS: D PTS: 1

Translation Exposure-Chapter 12

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16. 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: a. closing down most of its plants in the U.S. b. producing more automobiles in the U.S. c. relying completely on Japanese suppliers for its parts. d. pricing its exports in dollars.

ANS: B PTS: 1

17. 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? a. increase Zambian supply orders. b. increase Zambian sales. c. restructure debt to increase debt payments in Zambia. d. reduce Zambian sales.

ANS: B PTS: 1

18. Which of the following firms is not exposed to translation exposure? a. Firm X, with a fully owned subsidiary that periodically remits earnings generated in Great Britain to the U.S.-based parent. b. Firm Y, with a fully owned subsidiary that periodically generates foreign losses in Sweden. The parent covers at least some of these losses. c. Firm Z, with a fully owned subsidiary that generates substantial earnings in Germany. The subsidiary never remits earnings but reinvests them in Germany. d. All of the above firms are exposed to translation exposure.

ANS: D PTS: 1

19. represents any impact of exchange rate fluctuations on a firm's future cash flows. a. Translation exposure b. Economic exposure c. Transaction exposure d. None of the above

ANS: B PTS: 1

20. An effective way for an MNC to assess its economic exposure is to review the firm's: a. income statement. b. liquidity. c. retained earnings. d. level of stockholders' equity.

ANS: A PTS: 1

Translation Exposure-Chapter 12

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b. more; more c. less; fewer d. less; more

ANS: C PTS: 1

27. An MNC expects to sell fixed assets it utilizes in Europe in the distant future. In order to hedge the sale of these assets in the distant future, the MNC could create a(n) that the expected value of the assets in the future. a. asset; matches b. asset; exceeds c. liability; matches d. liability; is less than

ANS: C PTS: 1

28. 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. a. True b. False

ANS: T PTS: 1

29. exposure occurs when an MNC translates each subsidiary's financial data to its home currency for consolidated financial statements. a. Translation b. Transaction c. Economic d. None of the above

ANS: A PTS: 1

30. is (are) not a limitation of hedging translation exposure. a. Inaccurate stock price forecasts b. Inadequate forward contracts for some currencies c. Taxation on gains from forward contracts d. Increased transaction exposure

ANS: A PTS: 1

31. To hedge translation exposure, MNCs could that their foreign subsidiaries receive as earnings to create a cash outflow in the currency to offset the earnings received in that currency. a. purchase the currency forward b. sell the currency forward c. purchase futures contracts of the currency d. A or C e. none of the above

ANS: B PTS: 1

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32. Translation losses are , while gains on forward contracts used to hedge translation exposure are . a. tax deductible; not taxed b. not tax deductible; not taxed c. not tax deductible; taxed d. tax deductible; taxed

ANS: D PTS: 1

33. In general, it is more difficult to effectively hedge economic or translation exposure than to hedge transaction exposure. a. True b. False

ANS: T PTS: 1

34. A foreign subsidiary with more susceptible expenses than revenue to exchange rate movements will be favorably affected by an appreciation of the foreign currency. a. True b. False

ANS: F PTS: 1

35. U.S. firms can attempt to hedge their translation exposure of their European subsidiaries with a forward purchase of euros. a. True b. False

ANS: F PTS: 1

36. Hedging translation exposure with forward contracts can backfire if the currency being hedged depreciates. a. True b. False

ANS: F PTS: 1

37. A limitation of hedging translation exposure is that translation losses are not tax deductible, whereas gains on forward contracts used to hedge translation exposure are taxed. a. True b. False

ANS: T PTS: 1

38. 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). a. True b. False

ANS: T PTS: 1

Translation Exposure-Chapter 12

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45. Sarakose Co. is a U.S. company with sales to Canada amounting to C$5 million. Its cost of materials attributable to the purchase of Canadian goods is C$7 million. Its interest expense on Canadian loans is C$5 million. The dollar value of Sarakose's "earnings before interest and taxes" would if the Canadian dollar appreciates; the dollar value of its cash flows would if the Canadian dollar appreciates. a. increase; increase b. decrease; increase c. decrease; decrease d. increase; decrease e. increase; be unaffected

ANS: C PTS: 1

46. If a U.S. firm has much more revenue than expenses denominated in euros, the firm will likely if the euro. a. benefit; weakens b. be unaffected; weakens c. be unaffected; strengthens d. benefit; strengthens

ANS: D PTS: 1

47. Assume that Atlanta Co. is producing motorcycles and selling them to U.S. customers. Atlanta Co. obtains all of its supplies from American firms and has no competition in the U.S. It has one major competitor in Japan. Now assume that Phoenix Co. is producing office furniture and obtains its supplies from a Canadian firm. Based on this information, Atlanta Co. has exposure and Phoenix Co. has exposure. a. transaction; translation b. translation; transaction c. economic; transaction d. economic; translation

ANS: C PTS: 1

48. Orlando Co. produces home appliances and sells them in the U.S. It outsources the production of the appliances to a Chinese manufacturer, and the imported appliances are priced in dollars. Its major competitor for appliances is located in Mexico. Based on this information, Orlando Co. is subject to exposure. a. economic b. transaction c. translation d. economic and transaction

ANS: A PTS: 1

49. Tennessee Co. conducts business in the U.S. and Canada. The net cash flows from Canadian operations are expected to be C$500,000 next year. The Canadian dollar is valued at about $.90. The net cash flows from U.S. operations are supposed to be $200,000. To reduce sensitivity of its net cash flows without reducing its volume of business in Canada, Tennessee Co. could: a. purchase Canadian supplies. b. increase its borrowings in U.S. c. decrease prices on Canadian goods.

Translation Exposure-Chapter 12

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d. decrease its borrowed funds in Canada.

ANS: A PTS: 1

50. Mercury Co. has a subsidiary based in Italy and is exposed to translation exposure. Mercury forecasts that its earnings next year will be €10 million. Mercury decides to hedge the expected earnings by selling €10 million forward. During the next year, the euro appreciated. Mercury's consolidated earnings were affected by the euro's movement, and Mercury's hedge position was affected by the euro's movement. a. favorably; favorably b. favorably; adversely c. adversely; favorably d. adversely; adversely

ANS: B PTS: 1

51. All MNCs are subject to transaction exposure. a. True b. False

ANS: F PTS: 1

52. A foreign subsidiary with more revenue than expenses denominated in a foreign currency will be favorably affected by appreciation of the foreign currency. a. True b. False

ANS: T PTS: 1

53. Economic exposure represents any impact of exchange rate fluctuations on a firm's future cash flows and thus includes transaction exposure. a. True b. False

ANS: T PTS: 1

54. In general, it is more difficult to effectively hedge economic or translation exposure than to hedge transaction exposure. a. True b. False

ANS: T PTS: 1

55. To reduce economic exposure when a foreign currency has a greater impact on cash inflows, an MNC could reduce its level of foreign sales, increase its foreign supply orders, or restructure debt to increase debt payments in the foreign currency. a. True b. False

ANS: T PTS: 1

Translation Exposure-Chapter 12

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62. A U.S.-based MNC has a subsidiary in Barbados that generates substantial net cash inflows denominated in Barbados dollars. Given this information, the MNC would from a(n) of the Barbados dollar. a. benefit; appreciation b. benefit; depreciation c. not benefit; appreciation d. none of the above

ANS: A PTS: 1

63. Campbell Company has a subsidiary located in Jamaica. The subsidiary has generated losses for the last five years and is expected to generate losses for the next ten years. Campbell is reluctant to divest of this subsidiary, however. Given this information, Campbell would from a(n) of the Jamaican dollar. a. benefit; appreciation b. benefit; depreciation c. not benefit; appreciation d. not benefit; depreciation e. B and C

ANS: E PTS: 1

64. is (are) a limitation of hedging translation exposure. a. Inaccurate earnings forecasts b. Inadequate forward contracts for some currencies c. Accounting distortions d. Increased transaction exposure e. All of the above

ANS: E PTS: 1