国际财务管理课后习题答案chapter.docx
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国际财务管理课后习题答案chapter.docx
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国际财务管理课后习题答案chapter
CHAPTER10MANAGEMENTOFTRANSLATIONEXPOSURE
SUGGESTEDANSWERSANDSOLUTIONSTOEND-OF-CHAPTER
QUESTIONSANDPROBLEMS
QUESTIONS
1.Explainthedifferenceinthetranslationprocessbetweenthemonetary/nonmonetarymethodandthetemporalmethod.
Answer:
Underthemonetary/nonmonetarymethod,allmonetarybalancesheetaccountsofaforeignsubsidiaryaretranslatedatthecurrentexchangerate.Otherbalancesheetaccountsaretranslatedatthehistoricalrateexchangerateineffectwhentheaccountwasfirstrecorded.Underthetemporalmethod,monetaryaccountsaretranslatedatthecurrentexchangerate.Otherbalancesheetaccountsarealsotranslatedatthecurrentrate,iftheyarecarriedonthebooksatcurrentvalue.Iftheyarecarriedathistoricalvalue,theyaretranslatedattherateineffectonthedatetheitemwasputonthebooks.Sincefixedassetsandinventoryareusuallycarriedathistoricalcosts,thetemporalmethodandthemonetary/nonmonetarymethodwilltypicallyprovidethesametranslation.
2.Howaretranslationgainsandlosseshandleddifferentlyaccordingtothecurrentratemethodincomparisontotheotherthreemethods,thatis,thecurrent/noncurrentmethod,themonetary/nonmonetarymethod,andthetemporalmethod?
Answer:
Underthecurrentratemethod,translationgainsandlossesarehandledonlyasanadjustmenttonetworththroughanequityaccountnamedthe“cumulativetranslationadjustment”account.Nothingpassesthroughtheincomestatement.Theotherthreetranslationmethodspassforeignexchangegainsorlossesthroughtheincomestatementbeforetheyenterontothebalancesheetthroughtheaccumulatedretainedearningsaccount.
3.IdentifysomeinstancesunderFASB52whenaforeignentity’sfunctionalcurrencywouldbethesameastheparentfirm’scurrency.
Answer:
ThreeexamplesunderFASB52,wheretheforeignentity’sfunctionalcurrencywillbethesameastheparentfirm’scurrency,are:
i)theforeignentity’scashflowsdirectlyaffecttheparent’scashflowsandarereadilyavailableforremittancetotheparentfirm;ii)thesalespricesfortheforeignentity’sproductsareresponsiveonashort-termbasistoexchangeratechanges,wheresalespricesaredeterminedthroughworldwidecompetition;and,iii)thesalesmarketisprimarilylocatedintheparent’scountryorsalescontractsaredenominatedintheparent’scurrency.
4.DescribetheremeasurementandtranslationprocessunderFASB52ofawhollyownedaffiliatethatkeepsitsbooksinthelocalcurrencyofthecountryinwhichitoperates,whichisdifferentthanitsfunctionalcurrency.
Answer:
Foraforeignentitythatkeepsitsbooksinitslocalcurrency,whichisdifferentfromitsfunctionalcurrency,thetranslationprocessaccordingtoFASB52isto:
first,remeasurethefinancialreportsfromthelocalcurrencyintothefunctionalcurrencyusingthetemporalmethodoftranslation,andsecond,translatefromthefunctionalcurrencyintothereportingcurrencyusingthecurrentratemethodoftranslation.
5.Itis,generally,notpossibletocompletelyeliminatebothtranslationexposureandtransactionexposure.Insomecases,theeliminationofoneexposurewillalsoeliminatetheother.Butinothercases,theeliminationofoneexposureactuallycreatestheother.Discusswhichexposuremightbeviewedasthemostimportanttoeffectivelymanage,ifaconflictbetweencontrollingbotharises.Also,discussandcritiquethecommonmethodsforcontrollingtranslationexposure.
Answer:
Sinceitis,generally,notpossibletocompletelyeliminatebothtransactionandtranslationexposure,werecommendthattransactionexposurebegivenfirstprioritysinceitinvolvesrealcashflows.Thetranslationprocess,on-the-otherhand,hasnodirecteffectonreportingcurrencycashflows,andwillonlyhavearealizableeffectonnetinvestmentuponthesaleorliquidationoftheassets.
Therearetwocommonmethodsforcontrollingtranslationexposure:
abalancesheethedgeandaderivativeshedge.Thebalancesheethedgeinvolvesequatingtheamountofexposedassetsinanexposurecurrencywiththeexposedliabilitiesinthatcurrency,sothenetexposureiszero.Thuswhenanexposurecurrencyexchangeratechangesversusthereportingcurrency,thechangeinassetswilloffsetthechangeinliabilities.Tocreateabalancesheethedge,oncetransactionexposurehasbeencontrolled,oftenmeanscreatingnewtransactionexposure.Thisisnotwisesincerealcashflowlossescanresult.Aderivativeshedgeisnotreallyahedge,butratheraspeculativeposition,sincethesizeofthe“hedge”isbasedonthefutureexpectedspotrateofexchangefortheexposurecurrencywiththereportingcurrency.Iftheactualspotratediffersfromtheexpectedrate,the“hedge”mayresultinthelossofrealcashflows.
PROBLEMS
1.AssumethatFASB8isstillineffectinsteadofFASB52.ConstructatranslationexposurereportforCentraliaCorporationanditsaffiliatesthatisthecounterparttoExhibit10.7inthetext.Centraliaanditsaffiliatescarryinventoryandfixedassetsonthebooksathistoricalvalues.
Solution:
ThefollowingtableprovidesatranslationexposurereportforCentraliaCorporationanditsaffiliatesunderFASB8,whichisessentiallythetemporalmethodoftranslation.ThedifferencebetweenthenewreportandExhibit10.7isthatnonmonetaryaccountssuchasinventoryandfixedassetsaretranslatedatthehistoricalexchangerateiftheyarecarriedathistoricalcosts.Thus,theseaccountswillnotchangevalueswhenexchangerateschangeandtheydonotcreatetranslationexposure.
ExaminationofthetableindicatesthatunderFASB8thereisnegativenetexposurefortheMexicanpesoandtheeuro,whereasunderFASB52thenetexposureforthesecurrenciesispositive.ThereisnochangeinnetexposurefortheCanadiandollarandtheSwissfranc.Consequently,iftheeurodepreciatesagainstthedollarfrom€1.1000/$1.00to€1.1786/$1.00,asthetextexampleassumed,exposedassetswillnowfallinvaluebyasmalleramountthanexposedliabilities,insteadofviceversa.Theassociatedreportingcurrencyimbalancewillbe$239,415,calculatedasfollows:
ReportingCurrencyImbalance=
TranslationExposureReportunderFASB8forCentraliaCorporationanditsMexicanandSpanishAffiliates,December31,2005(in000CurrencyUnits)
Canadian
Dollar
Mexican
Peso
Euro
Swiss
Franc
Assets
Cash
CD200
Ps6,000
€825
SF0
Accountsreceivable
0
9,000
1,045
0
Inventory
0
0
0
0
Netfixedassets
0
0
0
0
Exposedassets
CD200
Ps15,000
€1,870
SF0
Liabilities
Accountspayable
CD0
Ps7,000
€1,364
SF0
Notespayable
0
17,000
935
1,400
Long-termdebt
0
27,000
3,520
0
Exposedliabilities
CD0
Ps51,000
€5,819
SF1,400
Netexposure
CD200
(Ps36,000)
(€3,949)
(SF1,400)
2.AssumethatFASB8isstillineffectinsteadofFASB52.ConstructaconsolidatedbalancesheetforCentraliaCorporationanditsaffiliatesafteradepreciationoftheeurofrom€1.1000/$1.00to€1.1786/$1.00thatisthecounterparttoExhibit10.8inthetext.Centraliaanditsaffiliatescarryinventoryandfixedassetsonthebooksathistoricalvalues.
Solution:
ThisproblemisthesequeltoProblem1.ThesolutiontoProblem1showedthatiftheeurodepreciatedtherewouldbeareportingcurrencyimbalanceof$239,415.UnderFASB8thisiscarriedthroughtheincomestatementasaforeignexchangegaintotheretainedearningsonthebalancesheet.Thefollowingtableshowsthatconsolidatedretainedearningsincreasedto$4,190,000from$3,950,000inExhibit10.8.Thisisanincreaseof$240,000,whichisthesameasthereportingcurrencyimbalanceafteraccountingforroundingerror.
ConsolidatedBalanceSheetunderFASB8forCentraliaCorporationanditsMexicanandSpanishAffiliates,December31,2005:
Post-ExchangeRateChange(in000Dollars)
CentraliaCorp.
(parent)
Mexican
Affiliate
Spanish
Affiliate
ConsolidatedBalanceSheet
Assets
Cash
$950a
$600
$700
$2,250
Accountsreceivable
1,450b
900
887
3,237
Inventory
3,000
1,500
1,500
6,000
InvestmentinMexicanaffiliate
-c
-
-
-
InvestmentinSpanishaffiliate
-d
-
-
-
Netfixedassets
9,000
4,600
4,000
17,600
Totalassets
$29,087
LiabilitiesandNetWorth
Accountspayable
$1,800
$700b
$1,157
$3,657
Notespayable
2,200
1,700
1,043e
4,943
Long-termdebt
7,110
2,700
2,987
12,797
Commonstock
3,500
-c
-d
3,500
Retainedearnings
4,190
-c
-d
4,190
Totalliabilitiesandnetworth
$29,087
aThisincludesCD200,000theparentfirmhasinaCanadianbank,carriedas$150,000.CD200,000/(CD1.3333/$1.00)=$150,000.
b$1,750,000-$300,000(=Ps3,000,000/(Ps10.00/$1.00))intracompanyloan=$1,450,000.
c,dInvestmentinaffiliatescancelswiththenetworthoftheaffiliatesintheconsolidation.
eTheSpanishaffiliateowesaSwissbankSF375,000(÷SF1.2727/€1.00=€294,649).Thisiscarriedonthebooks,
aftertheexchangeratechange,aspartof€1,229,649=€294,649+€935,000.€1,229,649/(€1.1786/$1.00)=$1,043,313.
3.InExample10.2,aforwardcontractwasusedtoestablishaderivatives“hedge”toprotectCentraliafromatranslationlossiftheeurodepreciatedfrom€1.1000/$1.00to€1.1786/$1.00.Assumethatanover-the-counterputoptionontheeurowithastrikepriceof€1.1393/$1.00(or$0.8777/€1.00)canbepurchasedfor$0.0088pereuro.Showhowthepotentialtranslationlosscanbe“hedged”withanoptioncontract.
Solution:
Asinexample10.2,ifthepotentialtranslationlossis$110,704,theequivalentamount
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