Exam 11: Translation Exposure

Translation exposure measures:

According to your authors, the main purpose of translation is:

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.

If management expects a foreign currency to depreciate, it could minimize translation exposure by increasing net exposed assets.

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

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

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.

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

Under U.S. accounting and translation practices, use of the current rate method is termed "translation" while use of the temporal method is termed "remeasurement."

Under the U.S. method of translation procedures, if the financial statements of the foreign subsidiary of a U.S. company are maintained in the local currency, and the local currency is the functional currency, then:

Translation exposure may also be called ________ exposure.

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.

________ gains and losses are "realized" whereas ________ gains and losses are only "paper."

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

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:

Consider two different foreign subsidiaries of Georgia-Pacific Wood Products Inc. The first subsidiary mills trees in Canada and ships its entire product to the Georgia-Pacific U.S. The second subsidiary is also owned by the parent firm but is located in Japan and retails tropical hardwood furniture that it buys from many different sources. The first subsidiary is likely a/an ________ foreign entity with most of its cash flows in U.S. dollars, and the second subsidiary is more of a/an ________ foreign entity.

One possible reason for a balance sheet hedge could be because the foreign subsidiary is about to be liquidated, so that value of its Cumulative Translation Adjustment (CTA)would be realized.

One possible reason for a balance sheet hedge could be because the firm has debt covenants or bank agreements that state the firm''s debt/equity ratios will be maintained within specific limits.

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

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.