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Exam 12: Managing Economic Exposure and Translation Exposure

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Question 1

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​Assume that a Japanese car manufacturer exports cars that are priced in yen to U.S. dealerships. The demand for those cars declines when the yen is strong. The manufacturer also produces some cars in the United States with U.S. materials, and those cars are priced in dollars. The manufacturer could reduce its economic exposure by:

A) ​closing down most of its plants in the United States.
B) ​producing more automobiles in the United States.
C) ​relying completely on Japanese suppliers for its parts.
D) ​pricing its exports in dollars.

E) B) and C)
F) C) and D)

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Question 2

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If a firm does not have foreign subsidiaries, it is not subject to:

A) transaction exposure.
B) economic exposure.
C) translation exposure
D) transaction exposure AND economic exposure.

E) A) and B)
F) A) and C)

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Question 3

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All MNCs are subject to transaction exposure.

Wisconsin, Inc. conducts business in Zambia. Years ago, Wisconsin established a subsidiary in Zambia that has consistently generated very large profits denominated in Zambian kwacha. Wisconsin wishes to restructure its operations to reduce economic exposure. Which of the following is not a feasible way of accomplishing this?

Laketown Co. has some expenses and revenue in euros. If its expenses are more sensitive to exchange rate movements than its revenue is, it could reduce economic exposure by ____. If its revenues are more sensitive than its expenses, it could reduce economic exposure by ____.

A foreign subsidiary with expenses that are more susceptible to exchange rate movements than its revenue will be favorably affected by an appreciation of the foreign currency.

A U.S.-based MNC has a subsidiary in Barbados that generates substantial net cash inflows denominated in Barbados dollars. Given this information, the MNC would ____ from a(n) ____ of the Barbados dollar.

To reduce economic exposure when a foreign currency has a greater impact on cash inflows than on cash outflows, an MNC could reduce its level of foreign sales, increase its foreign supply orders, or restructure debt to increase debt payments in the foreign currency.

In general, it is more difficult to effectively hedge economic or translation exposure than to hedge transaction exposure.

Tennessee Co. conducts business in the United States and Canada. The net cash flows from Canadian operations are expected to be C$500,000 next year. The Canadian dollar is valued at about $.90. The net cash flows from U.S. operations are expected to be $200,000. To reduce the sensitivity of its net cash flows without reducing its volume of business in Canada, Tennessee Co. could:

Economic exposure represents any impact of exchange rate fluctuations on a firm's future cash flows and thus includes transaction exposure.

A perfect hedge (full coverage) on translation exposure can usually be achieved when:

Even if translation exposure does not affect cash flows, it is a concern of many MNCs.

​Springfield Co., based in the United States, has costs from orders of foreign material that exceed its foreign revenue. All foreign transactions are denominated in the foreign currency of concern. This firm would ____ a stronger dollar and would ____ a weaker dollar.

To hedge translation exposure, MNCs could ____ that their foreign subsidiaries receive as earnings to create a cash outflow in the currency to offset the earnings received in that currency.

____ represents any impact of exchange rate fluctuations on a firm's future cash flows.

Cierra, Inc. is attempting to assess its degree of economic exposure in euros. In order to do so, it has applied regression analysis to determine whether the percentage change in its total cash flows is related to the percentage change in the euro. A ____ and statistically significant slope coefficient resulting from this analysis implies that the cash flows are ____ related to the percentage changes in the euro.

​With regard to hedging translation exposure, translation losses ____, and gains on forward contracts used to hedge translation exposure ____.

​Which of the following is an example of economic exposure but not an example of transaction exposure?

A foreign subsidiary with more revenue than expenses denominated in a foreign currency will be favorably affected by appreciation of the foreign currency.