Exam 12: Managing Economic Exposure and Translation Exposure

______________ is not a limitation of hedging translation exposure.

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:

If a firm is subject to ______,then it must be subject to translation exposure.

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.

__________ represents any impact of exchange rate fluctuations on a firm's future cash flows.

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

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

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.

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:

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.

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

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).

Sycamore (a U.S.firm)has no subsidiaries and presently has sales to Mexican customers amounting to MXP98 million,while its pesodenominated expenses amount to MXP41 million.  If it shifts its material orders from its Mexican suppliers to U.S.suppliers,it could reduce pesodenominated expenses by MXP12 million and increase dollardenominated 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.

Which of the following firms is not exposed to translation exposure

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.

Translation losses are __________,while gains on forward contracts used to hedge translation exposure are _______.

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.

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

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

Whitewater Co.is a U.S.company with sales to Canada amounting to C$8 million.  Its cost of goods sold 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 "earnings before taxes" would _______ if the Canadian dollar appreciates.