Exam 12: Managing Economic Exposure and Translation Exposure

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.

Springfield Co.,based in the U.S.,has a cost of goods sold attributable to foreign material orders 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.

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

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.

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.

As opposed to transaction exposure,managing economic exposure involves developing a ________ solution.

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

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

All MNCs are subject to translation exposure.

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

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

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

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

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

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

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

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

In general,it is more difficult to effectively hedge economic or translation exposure than to hedge transaction 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 _______.