Exam 12: Managing Economic Exposure and Translation Exposure

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

When a foreign currency has a greater impact on cash outflows than on cash inflows, one possibility in restructuring operations is to reduce foreign sales.

​____ is (are) not a limitation of hedging translation exposure.

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.

​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. Based on these exact figures, 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.

​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 United States. 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.

Which of the following is a possible strategy for reducing economic exposure?

____ exposure occurs when an MNC translates each subsidiary's financial data to its home currency for consolidated financial statements.

​An MNC is attempting to reduce its economic exposure by financing a portion of its business with loans in the foreign currency. If the foreign currency weakens, the MNC will need ____ of the foreign currency to cover the loan payment, while the MNC's foreign currency revenues will convert to ____ dollars.

Implementing a forward or money market hedge to hedge translation exposure may increase transaction exposure.

​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 ____ 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.

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).

Although forward contracts may reduce translation exposure at the expense of increasing transaction exposure, they are sometimes used to hedge translation exposure.

Thornton Corp. is based in the United States and has no foreign subsidiaries. It has extensive liabilities denominated in Indian rupees resulting from imports from India. However, Thornton's revenues are denominated solely in U.S. dollars. Which of the following is probably not true?

​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.

Transaction exposure results when an MNC translates each subsidiary's financial data to its home currency for consolidated financial statements.

Hedging translation exposure with forward contracts can backfire if the currency being hedged depreciates.

As opposed to transaction exposure, managing economic exposure involves developing a(n) ____ solution.

​Vermont Co. has foreign expenses denominated in euros that exceed foreign revenues. Appreciation of the euro relative to the U.S. dollar will cause this firm's reported earnings (from the consolidated income statement) to ____. If the firm desires to protect against this possibility, it could stabilize its reported earnings by ____ euros forward in the foreign exchange market.

​If a U.S. firm has much more revenue than expenses denominated in euros, the firm will likely ____ if the euro ____.