Exam 9: Measuring and Managing Translation and Transaction Exposure

Suppose the German subsidiary of a U.S. firm had current assets of DM3 million, fixed assets of DM6 million and current liabilities of DM3 million both at the start and at the end of the year. There are no long?term liabilities. If the DM depreciated during that year from $.48 to $.38, the FASB?52 translation gain (loss. to be included in the parent company's equity account is

If the functional currency is the Swiss franc, the net result under FASB?52 would be a

The major difference between the temporal method and the monetary/nonmonetary method is that

One argument that favors centralization of foreign risk management is the ability to take advantage of the portfolio effect through ________.

If the functional currency is the U.S. dollar, the net result under FASB?52 would be a

Suppose Alcoa has a payable of FF 1 million due in one year. Alcoa's cost of the payable using a money market hedge is ????? and its cost using a forward market hedge is ?????.

What value can Alcoa lock in for a receivable of FF 3 million due in one year if it executes a money market hedge today?

Du Pont has entered into a currency risk sharing arrangement with British Gas. Under the contract, Du Pont agrees to pay British Gas a base price of $10 million for gas purchases, but the parties would share the currency risk equally beyond a neutral zone, specified as a band of exchange rates: $1.67?1.73:£1. Within the neutral zone, Du Pont must pay BG the pound equivalent of $10 million at the base rate of $1.70. Suppose the spot rate at the time of payment is £1 = $1.63. How much will Du Pont owe British Gas?

Suppose PPP holds, markets are efficient, there are no taxes, and relative prices remain constant. In such a world,

In a forward market hedge, a company that is long a foreign currency will ____ the foreign currency forward.

If you fear the dollar will rise against the French franc, with a resulting adverse change in the dollar value of the equity of your French subsidiary, you can hedge by

A ________ involves simultaneously borrowing and lending activities in two different currencies to lock in the currency's value of a future foreign currency cash flow.

Which of the following is NOT a basic hedging technique during a currency depreciation?

Suppose General Motors uses a money market hedge to protect an Lit 200 million payable due in one year. The U.S. interest rate at the time of the hedge was 9% and the lira interest rate was 14%. If the spot rate moved from Lit 1293 at the start of the year to Lit 1349 at the end of the year, what was GM's cost of the money market hedge?

Goodyear has operations in both Germany and the Netherlands. Because of their membership in the European monetary system, the Dutch guilder and Deutsche mark are highly correlated in their movements against the U.S. dollar. If the Dutch unit has net inflows of guilders and the German unit has net inflows of DM, then Goodyear's combined transaction exposure

DEC is asked to quote a price in Belgian francs for computer sales to a Belgian company. The computers will be paid for in four equal, quarterly installments, beginning 90 days from now. DEC requires a minimum price of $2.5 million to accept this contract. Suppose the spot and forward rates for the Belgian franc are as follows: What is the minimum Belgian franc price that DEC should quote for this order?

The functional currency of a Malaysian subsidiary that assembles computers using U.S.?made parts, which it then sells in the United States, would most likely be the

The current standard for measuring translation exposure is

Under the current rate method, what is Ajax's translation gain (loss).?

The functional currency of a Colombian manufacturing subsidiary selling exclusively to the U.S.