Exam 12: Managing Economic Exposure and Translation Exposure

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

Hedging translation exposure with forward contracts can backfire if the currency being hedged depreciates.

Campbell Company has a subsidiary located in Jamaica. The subsidiary has generated losses for the last five years and is expected to generate losses for the next ten years. Campbell is reluctant to divest of this subsidiary, however. Given this information, Campbell would ____ from a(n) ____ of the Jamaican dollar.

Cierra, Inc. is attempting to assess its degree of economic exposure in euros. In order to do so, it has applied regression analysis to determine whether the percentage change in its total cash flow is related to the percentage change in the euro. A ____ and statistically significant slope coefficient resulting from this analysis implies that the cash flows are ____ related to the percentage changes in the euro.

Long-term forward contracts are a possible way to hedge the distant sale of fixed assets in foreign countries, but they may not be available for many emerging market currencies.

____ exposure occurs when an MNC translates each subsidiary's financial data to its home currency for consolidated financial statements.

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).

Translation losses are ____, while gains on forward contracts used to hedge translation exposure are ____.

____ is (are) not a limitation of hedging translation exposure.

Rockford Co. is a U.S. manufacturing firm that produces goods in the U.S. and sells all products to retail stores in the U.K.; the goods are denominated in pounds. It finances a small portion of its business with pound-denominated loans from British banks. Which of the following is true? (Assume that the amount of products to be sold is guaranteed by contracts.)

Tennessee Co. conducts business in the U.S. and Canada. The net cash flows from Canadian operations are expected to be C$500,000 next year. The Canadian dollar is valued at about $.90. The net cash flows from U.S. operations are supposed to be $200,000. To reduce sensitivity of its net cash flows without reducing its volume of business in Canada, Tennessee Co. could:

Translation exposure results when an MNC translates each subsidiary's financial data to its home currency for consolidated financial statements.

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

A perfect hedge (full coverage) on translation exposure can usually be achieved when:

Even if translation exposure does not affect cash flows, it is a concern of many MNCs.

Depreciation of the euro relative to the U.S. dollar will cause a U.S.-based multinational firm'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.

Although forward contracts may reduce translation exposure at the expense of increasing transaction exposure, they are sometimes used to hedge translation exposure.

To hedge translation exposure, MNCs could ____ that their foreign subsidiaries receive as earnings to create a cash outflow in the currency to offset the earnings received in that currency.

Implementing a forward or money market hedge to hedge translation exposure may increase transaction exposure.

Assume that a Japanese car manufacturer exports cars to U.S. dealerships, which are priced in yen. The demand for those cars declines when the yen is strong. The manufacturer also produces some cars in the U.S. with U.S. materials and those cars are priced in dollars. The manufacturer could reduce its economic exposure by: