Exam 12: Managing Economic Exposure and Translation Exposure

Translation exposure results 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.

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

Cierra, Inc. is attempting to assess its degree of economic exposure in euros. In order to do so, it has applied regression analysis to determine whether the percentage change in its total cash flows is related to the percentage change in the euro. A ____ and statistically significant slope coefficient resulting from this analysis implies that the cash flows are ____ related to the percentage changes in the euro.

To reduce economic exposure when a foreign currency has a greater impact on cash inflows than on cash outflows, 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.

Assume that a Japanese car manufacturer exports cars that are priced in yen to U.S. dealerships. The demand for those cars declines when the yen is strong. The manufacturer also produces some cars in the United States with U.S. materials, and those cars are priced in dollars. The manufacturer could reduce its economic exposure by:

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.

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.

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

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

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

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

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

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

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.

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

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

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

Even if translation exposure does not affect cash flows, it is a concern of many MNCs.