Deck 10: Measuring and Managing Translation and Transaction Exposure

Question 1

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

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

Answer 1

B

Question 2

Which one of the following would NOT be a suggested element for an effective exposure management strategy?

A)determine the types of exposure to be monitored
B)formulate corporate objectives
C)ensure that the corporate objectives a consistent with maximizing shareholder value
D)avoid the use of forward contracts where possible

Answer 2

D

Question 3

A __________ involves offsetting exposures in one currency with exposures in the same or another currency,where exchange rates are expected to move in such a way that losses on the first exposed position should be offset by gains on the second currency exposure and vice versa.

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

Answer 3

B

Question 4

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.

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

Question 5

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

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

Question 6

Firms that attempt to reduce risk and beat the market simultaneously may end up with

A)more risk,not less
B)less risk
C)a profit as well as reduced risk
D)a loss as well as reduced risk

Question 7

____________ exposure results from the possibility of incurring a gain or loss related to a sale or purchase already entered into and denominated in another currency.

A)translation
B)transaction
C)operating
D)accounting

Question 8

It is possible for transaction exposure to be positive and translation exposure in the same currency to be

A)always positive
B)exactly offsetting
C)negative
D)synonymous

Question 9

The type of exposure that measures the extent to which currency fluctuations can alter a company's future operating cash flows,that is,its future revenues and costs is known as

A)translation exposure
B)accounting exposure
C)transaction exposure
D)operating exposure

Question 10

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

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

Question 11

The basic hedging strategy involves

A)reducing hard currency assets and soft currency liabilities
B)increasing hard currency liabilities and soft currency assets
C)reducing soft currency assets and hard currency liabilities
D)converting soft currencies to hard currencies and lending hard currencies

Question 12

The FASB document that aims to establish accounting and reporting standards for derivative instruments and for hedging activities is FASB

A)8
B)52
C)100
D)133

Question 13

___________ a certain currency exposure means establishing an offsetting currency position so that the gain or loss from the exposure on the original currency is exactly offset buy the gain or loss from the currency hedge.

A)Arbitraging
B)Cross-hedging
C)Hedging
D)Risk shifting

Question 14

The ability to take advantage of the portfolio effect through exposure netting to manage foreign risk assumes the firm will use

A)centralization of its hedging activities
B)segmentation of its hedging activities to the firm's foreign subsidiaries
C)decentralization of its hedging activities
D)foreign banks and the purchase of forward contracts.

Question 15

The type of exposure that arises from the need,for purposes of reporting and consolidating,to convert the financial statements of foreign operations from the local currencies involved to the home currency is known as

A)translation exposure
B)accounting exposure
C)transaction exposure
D)both a and b

Question 16

Hedging cannot provide protection against ________ exchange rate changes.

A)expected
B)nominal
C)real
D)pegged

Question 17

The current standard for measuring translation exposure is

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

Question 18

Translation exposure reflects the exposure of a company's

A)foreign operations to currency movements
B)foreign sales to currency movements
C)financial statements to currency movements
D)cash flows to currency movements

Question 19

Under FASB 52,most financial statements must be translated using the

A)monetary/nonmonetary method
B)current/noncurrent method
C)current rate method
D)temporal method

Question 20

Which one of the following is most likely to depreciate?

A)hard currency
B)soft currency
C)currency with a high national growth rate
D)currency with expected interest rates expected to decrease

Question 21

Suppose it is 1987 and 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?

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

Question 22

The following information is to be used in answering questions 21?22.
In 1995,Ajax Manufacturing's German subsidiary has the following balance sheet:
Suppose the DM appreciates from $0.70 to $0.76 during the period.
Under the monetary/non-monetary method,what is Ajax's translation gain loss)?

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 23

A Japanese firm sells TV sets to an American importer for one billion yen payable in 90 days.To protect against exchange risk,the importer could

A)borrow yen,convert to dollars,and lend dollars for the interim period
B)sell yen on the forward market
C)sell a call option on yen
D)buy a futures contract for yen on the IMM

Question 24

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?

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

Question 25

The following information is to be used in answering questions 21?22.
In 1995,Ajax Manufacturing's German subsidiary has the following balance sheet:
Suppose the DM appreciates from $0.70 to $0.76 during the period.
Under the temporal method,what is Ajax's translation gain loss).?

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 26

Suppose PepsiCo hedges a ¥1 billion dividend it expects to receive from its Japanese subsidiary in 90 days with a forward contract.The current spot rate is ¥150/$1 and the 90?day forward rate is ¥149/$1.If the spot rate in 90 days is ¥154/$,how much has this forward market hedge cost PepsiCo?

A)$173,160
B)$44,743
C)Pepsi gains $173,160 from the forward contract
D)Pepsi gains $217,903 from the forward contract

Question 27

Which of the following is a basic hedging technique during a depreciation?

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 28

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

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

Question 29

Transaction gains and losses that result from adjusting assets and liabilities denominated in a currency other than the functional currency must appear on the foreign unit's income statement unless the gains or losses are attributable to

A)foreign currency transactions that are designated as an economic hedge of a net investment in a foreign entity
B)intercompany foreign?currency transactions that are of a short? term nature
C)foreign?currency transactions that involve currency speculation
D)the prospect of government intervention using currency controls

Question 30

The following information is to be used in answering questions 21?22.
In 1995,Ajax Manufacturing's German subsidiary has the following balance sheet:
Suppose the DM appreciates from $0.70 to $0.76 during the period.
Under the current rate method,what is Ajax's translation gain loss).?

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 31

In 1993,Ford simultaneously borrows Spanish pesetas at 13% and invests dollars at 10%,both for one year.At the time Ford enters into these transactions,the spot rate for the peseta is $0.095.If the spot rate is Ptas.1 = $0.087 in one year,what is the cost to Ford of this money market hedge?

A)2.0%
B)3.8%
C)1.3%
D)Ford has a 6.5% gain,not a cost

Question 32

Dell Computer has a £1 million receivable that it expects to collect in one year.Suppose the interest rate on pounds is 15%.How could Dell protect this receivable using a money market hedge?

A)borrow £1 million pounds today
B)lend £1 million pounds today
C)borrow £869,565 pounds today
D)lend £986,754 pounds today

Question 33

Suppose the English subsidiary of a U.S.firm had current assets of £1 million,fixed assets of £2 million and current liabilities of 1 million pounds both at the start and at the end of the year.There are no long?term liabilities.If the pound depreciated during that year from $1.50 to $1.30,the translation gain loss)to be included in the parent company's equity account according to FASB #52 is

A)0 since the current assets and current liabilities cancel
B)+$200,000
C)?$250,000
D)?$400,000

Question 34

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

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 35

American Airlines hedges a £2.5 million receivable by selling pounds forward.If the spot rate is £1 = $1.73 and the 90?day forward rate is $1.7158,what is American's cost of hedging?

A)$142,000
B)$35,500
C)$8,875
D)it is unknown at the time American enters into its hedge

Question 36

Suppose the German subsidiary of a U.S.firm had current assets of €3 million,fixed assets of €6 million and current liabilities of €3 million both at the start and at the end of the year.There are no long?term liabilities.If the euro 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

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

Question 37

Suppose that the spot rate and the 90?day forward rate on the pound sterling are $1.35 and $1.30,respectively.Your company,wishing to avoid foreign exchange risk,sells £500,000 forward 90 days.Assuming that the spot rate remains the same 90 days hence,your company would

A)receive £500,000 90 days hence
B)receive more than £500,000 in 90 days
C)have been better off not to have sold pounds forward
D)receive nothing

Question 38

On March 1,1998,Bechtel submits a franc?denominated bid on a project in France.Bechtel will not learn until June 1 whether it has won the contract.What is the most appropriate way for Bechtel to manage the exchange risk on this contract?

A)sell the franc amount of the bid forward for U.S.dollars
B)buy French francs forward in the amount of the contract
C)buy a put option on francs in the amount of the franc exposure
D)sell a call option on francs in the amount of franc exposure

Question 39

The following information is to be used in answering questions 21?22.
In 1995,Ajax Manufacturing's German subsidiary has the following balance sheet:
Suppose the DM appreciates from $0.70 to $0.76 during the period.
Under the current/noncurrent method,what is Ajax's translation gain loss).?

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 40

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

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

Question 41

The following information is to be used in answering questions 36?38.
U.S.borrowing rate for 1 year = 9.5%
U.S.deposit rate for 1 year = 8.7%
French borrowing rate for 1 year = 11.3%
French deposit rate for 1 year = 10.2%
French franc spot quote = $0.1763?78
French franc 1?year forward quote = $0.1729?47
What value can Alcoa lock in for its FF 3 million receivable if it executes a forward contract today?

A)$518,700
B)$524,100
C)$528,900
D)$532,410

Question 42

In 1990,Goodyear had operations in both Germany and the Netherlands.In the past the Dutch guilder and Deutsche mark were 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

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 between the company's subsidiaries
D)is not significant due to the highly correlated nature of the two currencies

Question 43

In 1996,DEC hedges a FF 3.2 million receivable due in 180 days.The current spot rate is FF 1 = $0.18834 and the 180?day forward rate is FF 1 = $0.18625.If the spot rate at the end of 180 days is $0.18728,how much has the forward market hedge cost DEC?

A)$6,688
B)$3,392
C)$3,296
D)DEC gains $6,688 on the hedge

Question 44

The following information is to be used in answering questions 36?38.
U.S.borrowing rate for 1 year = 9.5%
U.S.deposit rate for 1 year = 8.7%
French borrowing rate for 1 year = 11.3%
French deposit rate for 1 year = 10.2%
French franc spot quote = $0.1763?78
French franc 1?year forward quote = $0.1729?47
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?

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

Question 45

Suppose Alcoa in 1995 had 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 ?????.

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