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: 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)both a or b
D)none of the above

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:  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)both a or b 
D)none of the above

Quizplus · Accepted Answer

A change in the ¥-$ exchange rate will affect the valuation of the Japanese assets and liabilities of the MNC when consolidated into the parent company's balance sheet. This is known as translation exposure.

To hedge against this exposure, the MNC may need to either increase its liabilities denominated in yen or decrease its assets denominated in yen. Both of these options will help to balance out the impact of the exchange rate change on the consolidated balance sheet. Therefore, the best choice is option C, which includes both options as possible hedging strategies.