general business data bank

10.5 Trident Corporation's Translation Exposure

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

A) balance sheet

B) income statement

C) forward

D) translation

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

A) have a 2:1 ratio of assets to liabilities.

B) have a 2:1 ratio of liabilities to assets.

C) have a 2:1 ratio of liabilities to equity.

D) be equal.

3) If a firm's balance sheet has an equal amount of exposed foreign currency assets and liabilities and the firm translates by the temporal method, then

A) the net exposed position is called monetary balance.

B) the change of value of liabilities and assets due to a change in exchange rates will be of equal but opposite direction.

C) both A and B are true.

D) none of the above.

4) 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?

A) The foreign subsidiary is about to be liquidated, so that the value of its Cumulative Translation Adjustment (CTA) 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.

5) 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

A) 10% foreign exchange loss on the U.S. dollar accounts receivable.

B) 10% foreign exchange gain on the U.S. dollar accounts receivable.

C) since the Canadian firm is a U.S. subsidiary neither a gain nor loss will be recorded.

D) any gain or loss will be recorded only by the parent firm.

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

A) Translation; transaction

B) Transaction; translation

C) Translation; operating

D) None of the above

7) A balance sheet hedge is the main technique for managing ________.

A) transaction

B) operating

C) translation

D) money market

8) 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 ________.

A) gain of $50,000

B) loss of $50,000

C) gain of $450,000

D) loss of euro 450,000

9) 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 ________.

A) gain of $25,000

B) loss of $25,000

C) gain of $525,000

D) loss of euro 525,000

10.6 Managerial Implications

1) 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 ________.

A) gain of $50,000

B) loss of $50,000

C) gain of $450,000

D) loss of euro 450,000

2) If a European subsidiary of a U.S. firm has net exposed liabilities of euro 500,000, and the euro increases in value from $1.30/euro to $1.35/euro then the U.S. firm has a translation ________.

A) gain of $25,000

B) loss of $25,000

C) gain of $525,000

D) loss of euro 525,000

3) Using the table below, estimate the net exposure for Souris River Manufacturing of it's wholly-owned Canadian subsidiary.

A) C$40,000

B) C$160,000

C) C$166,000

D) C$200,000