Exam 12: Managing Economic Exposure and 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.)

Which of the following statements is incorrect?

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.

Any restructuring of operations that ____ the difference between a foreign currency's inflows and outflows may ____ economic exposure.

Which of the following is an example of economic exposure but not an example of transaction exposure?

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

All MNCs are subject to transaction exposure.

As opposed to transaction exposure, managing economic exposure involves developing a(n) ____ solution.

Thornton Corporation has extensive liabilities denominated in Cyprus pounds resulting from imports from Cyprus. However, Thornton's revenues are denominated solely in U.S. dollars. Which of the following is probably not true?

To reduce economic exposure when a foreign currency has a greater impact on cash inflows, an MNC could reduce its level of foreign sales, increase its foreign supply orders, or restructure debt to increase debt payments in the foreign currency.

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

Vermont Co. has foreign expenses denominated in euros that exceed foreign revenues. Appreciation of the euro relative to the U.S. dollar will cause this 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.

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

A foreign subsidiary with more susceptible expenses than revenue to exchange rate movements will be favorably affected by an appreciation of the foreign currency.

If a U.S. firm has much more revenue than expenses denominated in euros, the firm will likely ____ if the euro ____.

Assume a U.S. firm uses a forward contract to hedge all of its translation exposure. Also assume that the firm underestimated what its foreign earnings would be. Assume that the foreign currency depreciated over the year. The firm would generate a translation ____, which would be ____ than the gain generated by the forward contract.

Sarakose Co. is a U.S. company with sales to Canada amounting to C$5 million. Its cost of materials attributable to the purchase of Canadian goods is C$7 million. Its interest expense on Canadian loans is C$5 million. The dollar value of Sarakose's "earnings before interest and taxes" would ____ if the Canadian dollar appreciates; the dollar value of its cash flows would ____ if the Canadian dollar appreciates.

In general, it is more difficult to effectively hedge economic or translation exposure than to hedge transaction exposure.

Wisconsin Inc. conducts business in Zambia. Years ago, Wisconsin established a subsidiary in Zambia that has consistently generated very large profits denominated in Zambian kwacha. Wisconsin wishes to restructure its operations to reduce economic exposure. Which of the following is not a feasible way of accomplishing this?