Exam 10: Translation Exposure

If the European subsidiary of a U.S. firm has net exposed assets of euro 500,000, and the euro increases in value from $1.30/euro to $1.35/euro 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?

Balance sheet hedge requires an equal amount of exposed foreign currency assets and liabilities. A German company's subsidiary in Poland has Zloty as its functional currency. To hedge its translational exposure the company should

Balance sheet hedge is justified if

________ exposure is 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 transaction.

Exchange rate imbalances that are passed through the balance sheet affect a firm's reported income, but imbalances transferred to the income statement do not.

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

Translation exposure may also be called ________ 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

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

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

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

A Canadian subsidiary of a U.S. parent firm is instructed to bill an export to the parent in U.S. dollars. The Canadian subsidiary records the accounts receivable in Canadian dollars and notes a profit on the sale of goods. Later, when the U.S. parent pays the subsidiary the contracted U.S. dollar amount, the Canadian dollar has appreciated 10% against the U.S. dollar. In this example, the Canadian subsidiary will record a

The basic advantage of the ________ method of foreign currency translation is that foreign nonmonetary assets are carried at their original cost in the parent's consolidated statement while the most important advantage of the ________ method is that the gain or loss from translation does not pass through the income statement.

Functional currency is

The two basic methods for the translation of foreign subsidiary financial statements are the ________ method and the ________ method.

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

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

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.

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