Question 1

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

Accepted Answer

A)   0, since the current assets and current liabilities cancel
B)   +$300,000
C)   -$350,000
D)   -$600,000 D

Question 2

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

Accepted Answer

A)   transaction loss of $40,000 for the U.S. parent
B)   transaction gain of $56,383 for the U.S. parent
C)   transaction loss of $32,876 for the Swiss subsidiary
D)   transaction gain of $3176 for the U.S. parent B

Question 3

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

Accepted Answer

A)   under the monetary/nonmonetary method, long?term debt is translated at the historical rate, whereas under the temporal method, long?term debt is translated at the current rate
B)   under the monetary/nonmonetary method, inventory is always translated at the historical rate, whereas under the temporal method, inventory may be translated at the current rate if the inventory is shown on the balance sheet at market values
C)   under the monetary/nonmonetary method, fixed assets are translated at the historical rate, whereas under the temporal method, fixed assets may be translated at the current rate
D)   under the monetary/nonmonetary method, accounts receivable are always translated at the historical rate, whereas under the temporal method, receivables may be translated at the current rate B

Question 4

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

Accepted Answer

A)   risk shifting
B)   risk sharing
C)   offshore banking
D)   exposure netting

Question 5

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

Accepted Answer

A)   transaction loss of $40,000 for the U.S. parent
B)   transaction gain of $56,383 for the U.S. parent
C)   transaction loss of $32,876 for the Swiss subsidiary
D)   transaction gain of $3176 for the U.S. parent
E)   no transaction gain or loss for either the subsidiary or parent

Question 6

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 ?????.

Accepted Answer

A)   $173,900; $177,470
B)   $174,925; $176,300
C)   $176,671; $172,900
D)   $178,937; $174,700

Question 7

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?

Accepted Answer

A)   $525,540
B)   $516,545
C)   $530,012
D)   $520,940

Question 8

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?

Accepted Answer

A)   $10 million
B)   $9,702,381
C)   $9,588,235
D)   $9,819,277

Question 9

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

Accepted Answer

A)   hedging can not still be of value
B)   exchange risk management remains of vital concern
C)   markets are always free of inflation
D)   exchange risk is nonexistent

Question 10

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

Accepted Answer

A)   buy
B)   sell
C)   borrow
D)   lend

Question 11

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

Accepted Answer

A)   selling francs forward in the amount of net assets
B)   buying francs forward in the amount of net assets
C)   reducing the liabilities of the subsidiary
D)   selling francs forward in the amount of total assets

Question 12

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.

Accepted Answer

A)   forward contract
B)   currency collar
C)   money-market hedge
D)   currency option

Question 13

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

Accepted Answer

A)   buy local currency forward
B)   sell a local currency put option
C)   reduce levels of local currency cash and marketable securities
D)   loosen credit (increase local currency receivables)

Question 14

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?

Accepted Answer

A)   $3,647
B)   $414
C)   GM gained $1,069
D)   GM gained $5,631

Question 15

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

Accepted Answer

A)   approximately equals the sum of its guilder and DM exposures
B)   is less than the sum of its guilder and DM exposures because the currencies are highly correlated
C)   is less than the sum of its guilder and DM exposures because of diversification
D)   b and c

Question 16

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?

Accepted Answer

A)   BF 82,781,457
B)   BF 87,108,014
C)   BF 81,433,225
D)   BF 84,745,763

Question 17

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

Accepted Answer

A)   U.S. dollar
B)   Malaysian ringgit
C)   The supplier's currency
D)   The lender's currency

Question 18

The current standard for measuring translation exposure is

Accepted Answer

A)   the current/noncurrent method
B)   the monetary/nonmonetary method
C)   FASB 8
D)   FASB 52

Question 19

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

Accepted Answer

A)   a gain of $294,000
B)   a gain of $192,000
C)   a loss of $174,000
D)   a loss of $12,000

Question 20

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

Accepted Answer

A)   depends on where it sources its raw materials
B)   depends on where it sells the completed product
C)   will be the Colombian peso
D)   will be the U.S. dollar

Exam 9: Measuring and Managing Translation and Transaction Exposure