Question 1

It is possible that efforts to decrease translation exposure may result in an increase in transaction exposure.

Accepted Answer

A) True 
 B)False

Question 2

If the European subsidiary of a U.S. firm has net exposed assets of euro 500,000, and the euro drops in value from $1.40/euro to $1.30/euro the U.S. firm has a translation ________.

Accepted Answer

A)  gain of $50,000 
B)  loss of $50,000 
C)  gain of $450,000 
D)  loss of euro 450,000 
A)  gain of $50,000 
B)  loss of $50,000 
C)  gain of $450,000 
D)  loss of euro 450,000

Question 3

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 4

Which of the following firms would NOT bear risk caused by translation exposure?

Accepted Answer

A)  A U.S based manufacturing firm with a fully owned subsidiary that generates earnings in Japan. The subsidiary always keeps and reinvests the earnings. 
B)  A U.S. based retailer with a fully owned subsidiary in Canada that generates losses in Canada that the parent firm occasionally covers. 
C)  A U.S. based firm with a subsidiary in Britain that occasionally remits earnings to the parent firm. 
D)  All of the above are subject to translation exposure. 
A)  A U.S based manufacturing firm with a fully owned subsidiary that generates earnings in Japan. The subsidiary always keeps and reinvests the earnings. 
B)  A U.S. based retailer with a fully owned subsidiary in Canada that generates losses in Canada that the parent firm occasionally covers. 
C)  A U.S. based firm with a subsidiary in Britain that occasionally remits earnings to the parent firm. 
D)  All of the above are subject to translation exposure.

Question 5

If the parent firm and all subsidiaries denominate all exposed assets and liabilities in the parent's reporting currency this will ________ exposure but each subsidiary would have ________ exposure.

Accepted Answer

A)  maximize translation; no transaction 
B)  eliminate translation; transaction 
C)  maximize transaction; no translation 
D)  eliminate transaction; translation 
A)  maximize translation; no transaction 
B)  eliminate translation; transaction 
C)  maximize transaction; no translation 
D)  eliminate transaction; translation

Question 6

According to your authors, the main purpose of translation is

Accepted Answer

A)  to prepare consolidated financial statements. 
B)  to help management assess the performance of foreign subsidiaries. 
C)  to act as an interpreter for managers without foreign language skills. 
D)  none of the above. 
A)  to prepare consolidated financial statements. 
B)  to help management assess the performance of foreign subsidiaries. 
C)  to act as an interpreter for managers without foreign language skills. 
D)  none of the above.

Question 7

Describe a balance sheet hedge and give at least two examples of when such a hedge could be justified.

Accepted Answer

A balance sheet hedge attempts to equali

Question 8

Using the table below, estimate the net exposure for Souris River Manufacturing of its' wholly-owned Canadian subsidiary.
Souris River Manufacturing (Canada)Balance Sheet December 31 200X

Accepted Answer

A)  C$40,000 
B)  C$160,000 
C)  C$166,000 
D)  C$200,000 
A)  C$40,000 
B)  C$160,000 
C)  C$166,000 
D)  C$200,000

Question 9

Generally speaking, translation methods by country define the translation process as a function of what two factors?

Accepted Answer

A)  size; location 
B)  a firm's functional currency; location 
C)  location; foreign subsidiary independence 
D)  foreign subsidiary independence; a firm's functional currency 
A)  size; location 
B)  a firm's functional currency; location 
C)  location; foreign subsidiary independence 
D)  foreign subsidiary independence; a firm's functional currency

Question 10

Gains or losses caused by translation adjustments when using the current rate method are reported separately on the ________.

Accepted Answer

A)  consolidated statement of cash flow 
B)  consolidated income statement 
C)  consolidated balance sheet 
D)  none of the above 
A)  consolidated statement of cash flow 
B)  consolidated income statement 
C)  consolidated balance sheet 
D)  none of the above

Question 11

The main technique to minimize translation exposure is called a/an ________ hedge.

Accepted Answer

A)  balance sheet 
B)  income statement 
C)  forward 
D)  translation 
A)  balance sheet 
B)  income statement 
C)  forward 
D)  translation

Question 12

If a European subsidiary of a U.S. firm has net exposed liabilities of euro 500,000, and the euro drops in value from $1.40/euro to $1.30/euro then the U.S. firm has a translation ________.

Accepted Answer

A)  gain of $50,000 
B)  loss of $50,000 
C)  gain of $450,000 
D)  loss of euro 450,000 
A)  gain of $50,000 
B)  loss of $50,000 
C)  gain of $450,000 
D)  loss of euro 450,000

Question 13

The two methods for the translation of foreign subsidiary financial statements are the current rate and temporal methods. Briefly, describe how each of these methods translates the foreign subsidiary financial statements into the parent company's consolidated statements. Identify when each technique should be used and the major advantage(s) of each.

Accepted Answer

The current rate method translates almos

Question 14

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 15

Multinational enterprises always completely hedge translation exposure.

Accepted Answer

A) True 
 B)False

Question 16

When using FASB-52, translated gains and losses due to changes in foreign currency values are usually reported as ________.

Accepted Answer

A)  gains (losses) due to foreign exchange 
B)  net income (loss) 
C)  stockholder equity 
D)  none of the above 
A)  gains (losses) due to foreign exchange 
B)  net income (loss) 
C)  stockholder equity 
D)  none of the above

Question 17

Management can easily offset both translation and transaction exposure through

Accepted Answer

A)  a passive hedging strategy. 
B)  an active hedging strategy. 
C)  either an active or passive hedging strategy. 
D)  It is almost impossible to offset both translation and transaction exposure simultaneously. 
A)  a passive hedging strategy. 
B)  an active hedging strategy. 
C)  either an active or passive hedging strategy. 
D)  It is almost impossible to offset both translation and transaction exposure simultaneously.

Question 18

Under the current rate method, when management anticipates appreciation of a foreign currency it

Accepted Answer

A)  may move funds from cash to savings. 
B)  may move funds from cash into plant and equipment. 
C)  may try to decrease net exposed assets in that country. 
D)  may try to increase net exposed assets in that country. 
A)  may move funds from cash to savings. 
B)  may move funds from cash into plant and equipment. 
C)  may try to decrease net exposed assets in that country. 
D)  may try to increase net exposed assets in that country.

Question 19

The temporal rate method is the most prevalent method today for the translation of financial statements.

Accepted Answer

A) True 
 B)False

Question 20

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

Exam 11: Translation Exposure

It is possible that efforts to decrease translation exposure may result in an increase in transaction exposure.

If the European subsidiary of a U.S. firm has net exposed assets of euro 500,000, and the euro drops in value from $1.40/euro to $1.30/euro the U.S. firm has a translation ________.

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

Which of the following firms would NOT bear risk caused by translation exposure?

If the parent firm and all subsidiaries denominate all exposed assets and liabilities in the parent's reporting currency this will ________ exposure but each subsidiary would have ________ exposure.

According to your authors, the main purpose of translation is

Describe a balance sheet hedge and give at least two examples of when such a hedge could be justified.

Using the table below, estimate the net exposure for Souris River Manufacturing of its' wholly-owned Canadian subsidiary. Souris River Manufacturing (Canada)Balance Sheet December 31 200X

Generally speaking, translation methods by country define the translation process as a function of what two factors?

Gains or losses caused by translation adjustments when using the current rate method are reported separately on the ________.

The main technique to minimize translation exposure is called a/an ________ hedge.

If a European subsidiary of a U.S. firm has net exposed liabilities of euro 500,000, and the euro drops in value from $1.40/euro to $1.30/euro then the U.S. firm has a translation ________.

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?

Multinational enterprises always completely hedge translation exposure.

When using FASB-52, translated gains and losses due to changes in foreign currency values are usually reported as ________.

Management can easily offset both translation and transaction exposure through

Under the current rate method, when management anticipates appreciation of a foreign currency it

The temporal rate method is the most prevalent method today for the translation of financial statements.

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.

Globalization and the Multinational Enterprise

Financial Goals and Corporate Governance

The International Monetary System

The Balance of Payments

The Foreign Exchange Market

International Parity Conditions

Foreign Exchange Rate Determination and Forecasting

Foreign Currency Derivatives

Transaction Exposure

Operating Exposure

Global Cost and Availability of Capital

Sourcing Equity Capital Globally

Financial Structure and International Debt

Interest Rate and Currency Swaps

International Portfolio Theory and Diversification

Foreign Direct Investment Theory and Strategy

Political Risk Assessment and Management

Multinational Capital Budgeting

International Trade Finance

Multinational Tax Management

Working Capital Management

Filters

If the parent firm and all subsidiaries denominate all exposed assets and liabilities in the parent's reporting currency this will exposure but each subsidiary would have exposure.