Exam 12: Managing Economic Exposure and Translation 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.

Thornton Corp. is based in the U.S. 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?

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

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

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.

____ is (are) a limitation of hedging translation exposure.

Springfield Co., based in the United States, has costs from orders of foreign material that exceed 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.

A foreign subsidiary with more revenue than expenses denominated in a foreign currency will be favorably affected by appreciation of the foreign currency.

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

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.

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.

Which of the following firms is not exposed to 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.

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.

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

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).

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

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