Question 1

________ occur as a result of changes in the value of currency, whereas ________ occur as a result of ongoing business activities.

Accepted Answer

A)  Operating gains or losses; translation gains or losses 
B)  Swap losses; translation gains or losses 
C)  Translation gains or losses; operating gains or losses 
D)  all of the above 
A)  Operating gains or losses; translation gains or losses 
B)  Swap losses; translation gains or losses 
C)  Translation gains or losses; operating gains or losses 
D)  all of the above

Question 2

If management anticipates an appreciation of the foreign currency, it should decrease net exposed assets to benefit from a gain.

Accepted Answer

A) True 
 B)False

Question 3

A foreign subsidiary's ________ currency is the currency used in the firm's day-to-day operations.

Accepted Answer

A)  local 
B)  integrated 
C)  notational dollar 
D)  functional 
A)  local 
B)  integrated 
C)  notational dollar 
D)  functional

Question 4

If the same exchange rate were used to remeasure every line on a financial statement, then there would be no imbalances from remeasuring.

Accepted Answer

A) True 
 B)False

Question 5

If the British subsidiary of a European firm has net exposed assets of £250,000, and the pound drops in value from €1.35/£ to €1.30/£, the European firm has a translation:

Accepted Answer

A)  gain of €12,500. 
B)  loss of €12,500. 
C)  loss of £12,500. 
D)  gain of £12,500. 
A)  gain of €12,500. 
B)  loss of €12,500. 
C)  loss of £12,500. 
D)  gain of £12,500.

Question 6

If the financial statements of the foreign subsidiary are maintained in the local currency and the U.S. dollar is the functional currency, they are remeasured by the temporal method.

Accepted Answer

A) True 
 B)False

Question 7

Under the temporal rate method, specific assets and liabilities are translated at exchange rates consistent with the timing of the item's creation.

Accepted Answer

A) True 
 B)False

Question 8

If the European subsidiary of a U.S. firm has net exposed assets of €750,000, and the euro drops in value from $1.30/euro to $1.20/€ the U.S. firm has a translation:

Accepted Answer

A)  gain of $75,000. 
B)  loss of $75,000. 
C)  gain of $625,000. 
D)  loss of €576,923. 
A)  gain of $75,000. 
B)  loss of $75,000. 
C)  gain of $625,000. 
D)  loss of €576,923.

Question 9

The temporal method of foreign currency translation gains or losses resulting from remeasurement are carried directly to current consolidated income and thus introduces volatility to consolidated earnings.

Accepted Answer

A) True 
 B)False

Question 10

If a firm's subsidiary is using the local currency as the functional currency, which of the following is NOT a circumstance that could justify the use of a balance sheet hedge?

Accepted Answer

A)  The foreign subsidiary is about to be liquidated, so that the value of its Cumulative Translation Adjustment (CT
A)  would be realized. 
B)  The firm has debt covenants or bank agreements that state the firm's debt/equity ratio will be maintained within specific limits. 
C)  The foreign subsidiary is operating is a hyperinflationary environment. 
D)  All of the above are appropriate reasons to use a balance sheet hedge. 
A)  The foreign subsidiary is about to be liquidated, so that the value of its Cumulative Translation Adjustment (CT
A)  would be realized. 
B)  The firm has debt covenants or bank agreements that state the firm's debt/equity ratio will be maintained within specific limits. 
C)  The foreign subsidiary is operating is a hyperinflationary environment. 
D)  All of the above are appropriate reasons to use a balance sheet hedge.

Question 11

The ________ determines accounting policy for U.S. firms.

Accepted Answer

A)  Securities and Exchange Commission (SE
C)  
B)  Federal Reserve System (Fed) 
C)  Financial Accounting Standards Board (FAS
B)  
D)  General Agreement on Tariffs and Trade (GATT) 
A)  Securities and Exchange Commission (SE
C)  
B)  Federal Reserve System (Fed) 
C)  Financial Accounting Standards Board (FAS
B)  
D)  General Agreement on Tariffs and Trade (GATT)

Question 12

Translation exposure measures:

Accepted Answer

A)  changes in the value of outstanding financial obligations incurred prior to a change in exchange rates. 
B)  the potential for an increase or decrease in the parent company's net worth and reported net income caused by a change in exchange rates since the last consolidation of international operations. 
C)  an unexpected change in exchange rates impact on short run expected cash flows. 
D)  none of the above 
A)  changes in the value of outstanding financial obligations incurred prior to a change in exchange rates. 
B)  the potential for an increase or decrease in the parent company's net worth and reported net income caused by a change in exchange rates since the last consolidation of international operations. 
C)  an unexpected change in exchange rates impact on short run expected cash flows. 
D)  none of the above

Question 13

A/An ________ subsidiary is one in which the firm operates as an extension of the parent company with cash flows highly interrelated with the parent.

Accepted Answer

A)  self-sustaining foreign 
B)  integrated foreign entity 
C)  foreign 
D)  none of the above 
A)  self-sustaining foreign 
B)  integrated foreign entity 
C)  foreign 
D)  none of the above

Question 14

A balance sheet hedge requires that the amount of exposed foreign currency assets and liabilities:

Accepted Answer

A)  have a 2:1 ratio of assets to liabilities. 
B)  have a 2:1 ratio of liabilities to assets. 
C)  have a 2:1 ratio of liabilities to equity. 
D)  be equal. 
A)  have a 2:1 ratio of assets to liabilities. 
B)  have a 2:1 ratio of liabilities to assets. 
C)  have a 2:1 ratio of liabilities to equity. 
D)  be equal.

Question 15

The biggest advantage of the current rate method of reporting translation adjustments is the fact that the gain or loss goes directly to the reserve account on the consolidated balance sheet and does not pass through the consolidated income statement.

Accepted Answer

A) True 
 B)False

Question 16

Historical exchange rates may be used for ________, while current exchange rates may be used for ________.

Accepted Answer

A)  fixed assets and current assets; income and expense items 
B)  equity accounts and fixed assets; current assets and liabilities 
C)  current assets and liabilities; equity accounts and fixed assets 
D)  equity accounts and current liabilities; current assets and fixed assets 
A)  fixed assets and current assets; income and expense items 
B)  equity accounts and fixed assets; current assets and liabilities 
C)  current assets and liabilities; equity accounts and fixed assets 
D)  equity accounts and current liabilities; current assets and fixed assets

Question 17

Which of the following primary principles of U.S. translation procedures is NOT true?

Accepted Answer

A)  If the financial statements of the foreign subsidiary of a U.S. company are maintained in U.S. dollars, translation is not required. 
B)  If the financial statements of the foreign subsidiary are maintained in the local currency and the local currency is the functional currency, they are translated by the temporal method. 
C)  If the financial statements of the foreign subsidiary are maintained in the local currency and the U.S. dollar is the functional currency, they are remeasured by the temporal method. 
D)  All of the above are true. 
A)  If the financial statements of the foreign subsidiary of a U.S. company are maintained in U.S. dollars, translation is not required. 
B)  If the financial statements of the foreign subsidiary are maintained in the local currency and the local currency is the functional currency, they are translated by the temporal method. 
C)  If the financial statements of the foreign subsidiary are maintained in the local currency and the U.S. dollar is the functional currency, they are remeasured by the temporal method. 
D)  All of the above are true.

Question 18

If the European subsidiary of a U.S. firm has net exposed assets of €200,000, and the euro increases in value from $1.22/€ to $1.26/€ the U.S. firm has a translation:

Accepted Answer

A)  gain of $8,000. 
B)  loss of $8,000. 
C)  gain of $252,000. 
D)  loss of €252,000. 
A)  gain of $8,000. 
B)  loss of $8,000. 
C)  gain of $252,000. 
D)  loss of €252,000.

Question 19

If the British subsidiary of a European firm has net exposed assets of £125,000, and the pound increases in value from €1.40/£ to €1.44/£, the European firm has a translation:

Accepted Answer

A)  loss of €5,000. 
B)  gain of €5,000. 
C)  gain of £5,000. 
D)  loss of £5,000. 
A)  loss of €5,000. 
B)  gain of €5,000. 
C)  gain of £5,000. 
D)  loss of £5,000.

Question 20

If a firm's balance sheet has an equal amount of exposed foreign currency assets and liabilities and the firm translates by the temporal method, then:

Accepted Answer

A)  the net exposed position is called monetary balance. 
B)  the change is value of liabilities and assets due to a change in exchange rates will be of equal but opposite direction. 
C)  Both A and B are true. 
D)  none of the above 
A)  the net exposed position is called monetary balance. 
B)  the change is value of liabilities and assets due to a change in exchange rates will be of equal but opposite direction. 
C)  Both A and B are true. 
D)  none of the above

occur as a result of changes in the value of currency, whereas occur as a result of ongoing business activities.

If management anticipates an appreciation of the foreign currency, it should decrease net exposed assets to benefit from a gain.

A foreign subsidiary's ________ currency is the currency used in the firm's day-to-day operations.

If the same exchange rate were used to remeasure every line on a financial statement, then there would be no imbalances from remeasuring.

If the British subsidiary of a European firm has net exposed assets of £250,000, and the pound drops in value from €1.35/£ to €1.30/£, the European firm has a translation:

If the financial statements of the foreign subsidiary are maintained in the local currency and the U.S. dollar is the functional currency, they are remeasured by the temporal method.

Under the temporal rate method, specific assets and liabilities are translated at exchange rates consistent with the timing of the item's creation.

If the European subsidiary of a U.S. firm has net exposed assets of €750,000, and the euro drops in value from $1.30/euro to $1.20/€ the U.S. firm has a translation:

The temporal method of foreign currency translation gains or losses resulting from remeasurement are carried directly to current consolidated income and thus introduces volatility to consolidated earnings.

If a firm's subsidiary is using the local currency as the functional currency, which of the following is NOT a circumstance that could justify the use of a balance sheet hedge?

The ________ determines accounting policy for U.S. firms.

Translation exposure measures:

A/An ________ subsidiary is one in which the firm operates as an extension of the parent company with cash flows highly interrelated with the parent.

A balance sheet hedge requires that the amount of exposed foreign currency assets and liabilities:

The biggest advantage of the current rate method of reporting translation adjustments is the fact that the gain or loss goes directly to the reserve account on the consolidated balance sheet and does not pass through the consolidated income statement.

Historical exchange rates may be used for , while current exchange rates may be used for .

Which of the following primary principles of U.S. translation procedures is NOT true?

If the European subsidiary of a U.S. firm has net exposed assets of €200,000, and the euro increases in value from $1.22/€ to $1.26/€ the U.S. firm has a translation:

If the British subsidiary of a European firm has net exposed assets of £125,000, and the pound increases in value from €1.40/£ to €1.44/£, the European firm has a translation:

If a firm's balance sheet has an equal amount of exposed foreign currency assets and liabilities and the firm translates by the temporal method, then:

Multinational Financial Management: Opportunities and Challenges

The International Monetary System

The Balance of Payments

Financial Goals and Corporate Governance

The Foreign Exchange Market

International Parity Conditions

Foreign Currency Derivatives: Futures and Options

Interest Risk and Swaps

Foreign Exchange Rate Determination and Intervention

Transaction Exposure

Operating Exposure

Global Cost and Availability of Capital

Funding the Multinational Firm

Multinational Tax Management

International Trade Finance

Foreign Direct Investment and Political Risk

Multinational Capital Budgeting and Cross-Border Acquisitions

Filters

Exam 11: Translation Exposure

________ occur as a result of changes in the value of currency, whereas ________ occur as a result of ongoing business activities.

If management anticipates an appreciation of the foreign currency, it should decrease net exposed assets to benefit from a gain.

A foreign subsidiary's ________ currency is the currency used in the firm's day-to-day operations.

If the same exchange rate were used to remeasure every line on a financial statement, then there would be no imbalances from remeasuring.

If the British subsidiary of a European firm has net exposed assets of £250,000, and the pound drops in value from €1.35/£ to €1.30/£, the European firm has a translation:

If the financial statements of the foreign subsidiary are maintained in the local currency and the U.S. dollar is the functional currency, they are remeasured by the temporal method.

Under the temporal rate method, specific assets and liabilities are translated at exchange rates consistent with the timing of the item's creation.

If the European subsidiary of a U.S. firm has net exposed assets of €750,000, and the euro drops in value from $1.30/euro to $1.20/€ the U.S. firm has a translation:

The temporal method of foreign currency translation gains or losses resulting from remeasurement are carried directly to current consolidated income and thus introduces volatility to consolidated earnings.

If a firm's subsidiary is using the local currency as the functional currency, which of the following is NOT a circumstance that could justify the use of a balance sheet hedge?

The ________ determines accounting policy for U.S. firms.

Translation exposure measures:

A/An ________ subsidiary is one in which the firm operates as an extension of the parent company with cash flows highly interrelated with the parent.

A balance sheet hedge requires that the amount of exposed foreign currency assets and liabilities:

The biggest advantage of the current rate method of reporting translation adjustments is the fact that the gain or loss goes directly to the reserve account on the consolidated balance sheet and does not pass through the consolidated income statement.

Historical exchange rates may be used for ________, while current exchange rates may be used for ________.

Which of the following primary principles of U.S. translation procedures is NOT true?

If the European subsidiary of a U.S. firm has net exposed assets of €200,000, and the euro increases in value from $1.22/€ to $1.26/€ the U.S. firm has a translation:

If the British subsidiary of a European firm has net exposed assets of £125,000, and the pound increases in value from €1.40/£ to €1.44/£, the European firm has a translation:

If a firm's balance sheet has an equal amount of exposed foreign currency assets and liabilities and the firm translates by the temporal method, then:

Multinational Financial Management: Opportunities and Challenges

The International Monetary System

The Balance of Payments

Financial Goals and Corporate Governance

The Foreign Exchange Market

International Parity Conditions

Foreign Currency Derivatives: Futures and Options

Interest Risk and Swaps

Foreign Exchange Rate Determination and Intervention

Transaction Exposure

Operating Exposure

Global Cost and Availability of Capital

Funding the Multinational Firm

Multinational Tax Management

International Trade Finance

Foreign Direct Investment and Political Risk

Multinational Capital Budgeting and Cross-Border Acquisitions

Filters

occur as a result of changes in the value of currency, whereas occur as a result of ongoing business activities.

Historical exchange rates may be used for , while current exchange rates may be used for .