Consider a U.S.-based MNC with manufacturing activities in Japan.The result of a change in the ¥-$ exchange rate on the assets and liabilities of the consolidated balance sheet is $$\begin{array} { l l l }
\text { Exposed assets } & \text { ¥ } & 700,000,000 \
\text { Exposed liabilities } & \text { ¥ } & 500,000,000
\end{array}$$ Ignoring transaction exposure in the yen,the translation exposure will indicate a possible need for a "balance sheet hedge" of
A)¥200,000,000 more liabilities denominated in yen.
B)¥200,000,000 less assets denominated in yen.
C)¥200,000,000 more liabilities denominated in yen or ¥200,000,000 less assets denominated in yen.
D)none of the options

Question

Consider a U.S.-based MNC with manufacturing activities in Japan.The result of a change in the ¥-$ exchange rate on the assets and liabilities of the consolidated balance sheet is $$\begin{array} { l l l } 
\text { Exposed assets } & \text {  ¥ } & 700,000,000 \
\text { Exposed liabilities } & \text {  ¥ } & 500,000,000
\end{array}$$ Ignoring transaction exposure in the yen,the translation exposure will indicate a possible need for a "balance sheet hedge" of
A)¥200,000,000 more liabilities denominated in yen.
B)¥200,000,000 less assets denominated in yen.
C)¥200,000,000 more liabilities denominated in yen or ¥200,000,000 less assets denominated in yen.
D)none of the options

Quizplus · Accepted Answer

Translation exposure is the risk of changes in the financial statements of a foreign subsidiary due to changes in exchange rates. From the given information, we can calculate the company's net yen exposure as ¥200,000,000 (¥700,000,000 - ¥500,000,000). If the yen appreciates, the company's exposed assets denominated in yen will decrease, and exposed liabilities denominated in yen will increase. If the yen depreciates, the opposite will occur. To offset this risk, the company can either increase yen liabilities by ¥200,000,000, or reduce yen assets by ¥200,000,000, depending on their currency risk management strategy. Therefore, the correct choice is C.

Consider a U Ignoring Transaction Exposure in the Yen,the Translation Exposure Will Indicate