Exam 12: Managing Economic Exposure and Translation Exposure

Rockford Co. is a U.S. manufacturing firm that produces products in the United States and sells all the products to retail stores in the United Kingdom; the sales are denominated in pounds. It finances a small portion of its business with pound-denominated loans from British banks. Assume that the amount of products to be sold is guaranteed by contracts. The dollar value of sales is:

Assume that an MNC's cash flows are positively related to the movements in a foreign currency. If the MNC expects the foreign currency to weaken, it could purchase the currency forward to reduce its degree of economic exposure.

​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.

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

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

All MNCs are subject to translation exposure.

​An MNC has fixed assets in Europe that it expects to sell 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.

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

U.S. firms can attempt to hedge the translation exposure of their European subsidiaries with a forward purchase of euros.

The management of economic exposure is normally focused completely on transactions that will occur in the next three months.

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

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.

​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.

Managing economic exposure is generally perceived to be ____ managing transaction exposure.

Depreciation of the euro relative to the U.S. dollar will cause a U.S.-based MNC'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.

If revenues and costs are equally sensitive to exchange rate movements, MNCs may reduce their economic exposure by restructuring their operations to shift the sources of costs or revenues to other locations so that:

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

U.S.-based MNCs invoicing in Asian currencies and incurring expenses in Asian currencies will probably be less affected by weakness in Asian currencies than U.S.-based MNCs that invoice in Asian currencies but do not incur expenses in those currencies.