International Financial Management Study Set 9

Business

Quiz 12 :

Managing Economic Exposure and Translation Exposure

Quiz 12 :

Managing Economic Exposure and Translation Exposure

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Rockington ltd. is a UK manufacturing firm that produces goods in the UK and sells all products to retail stores in the US; the goods are denominated in dollars. It finances a small portion of its business with dollar-denominated loans from US banks. Which of the following is true? (Assume that the amount of products to be sold is guaranteed by contracts.)
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D

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Managing economic exposure is generally perceived to be ____ managing transaction exposure.
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A

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Sycamore (a UK firm) has no subsidiaries and presently has sales to Mexican customers amounting to MXP 98 million, while its peso-denominated expenses amount to MXP 41 million. If it shifts its material orders from its Mexican suppliers to UK suppliers, it could reduce peso-denominated expenses by MXP 12 million and increase pound-denominated expenses by £400,000. This strategy would ____ the Sycamore's exposure to changes in the peso's movements against the pound. Regardless of whether the firm shifts expenses, it is likely to perform better when the peso value is ____ relative to the pound.
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D

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Transaction exposure results when an MNC translates each subsidiary's financial data to its home currency for consolidated financial statements.
True False
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In general, it is more difficult to effectively hedge economic or translation exposure than to hedge transaction exposure.
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UK-based MNCs invoicing in Asian currencies and incurring expenses in Asian currencies were probably less affected by weakness of Asian currencies than UK-based MNCs that invoice in Asian currencies but do not incur expenses in those currencies.
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A foreign subsidiary with more susceptible expenses than revenue to exchange rate movements will be favourably affected by an appreciation of the foreign currency.
True False
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If a firm is subject to ____, then it must be subject to translation exposure.
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____ represents any impact of exchange rate fluctuations on a firm's future cash flows.
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Any restructuring of operations that ____ the difference between a foreign currency's inflows and outflows may ____ economic exposure.
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It is generally least difficult to effectively hedge various types of:
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____ exposure occurs when an MNC translates each subsidiary's financial data to its home currency for consolidated financial statements.
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As opposed to transaction exposure, managing economic exposure involves developing a ____ solution.
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Depreciation of the pound relative to the US dollar will cause a US-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 ____ pounds forward in the foreign exchange market.
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An MNC expects to sell fixed assets it utilizes in the US in the distant future. In order to hedge the sale of these assets in the distant future, the MNC could create a(n) ____ that ____ the expected value of the assets in the future.
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Which of the following is an example of economic exposure but not an example of transaction exposure?
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Although forward contracts may reduce translation exposure at the expense of increasing transaction exposure, they are sometimes used to hedge translation exposure.
True False
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A limitation of hedging translation exposure is that translation losses are not tax deductible, whereas gains on forward contracts used to hedge translation exposure are taxed.
True False
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Springfield plc, based in the UK, has a cost of goods sold attributable to foreign material orders that exceeds its foreign revenue. All foreign transactions are denominated in the foreign currency of concern. This firm would ____ a stronger pound and would ____ a weaker pound.
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All MNCs are subject to translation exposure.
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