国际财务管理系统课后习题问题详解chapter10.docx
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国际财务管理系统课后习题问题详解chapter10.docx
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国际财务管理系统课后习题问题详解chapter10
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“cumulative
translationadjustment”
account.Nothingpassesthroughtheincomestatement.The
otherthreetranslation
methodspassforeignexchangegainsorlossesthroughthe
incomestatementbefore
theyenterontothebalancesheetthroughtheaccumulated
retainedearningsaccount.
currencywouldbethesameastheparentfirm
Answer:
Threeexamplesunder
FASB52,wherethe
foreign
entity
sfunctional
currency
willbethe
sameas
theparentfirm'
s
currency,
are:
i)
the
foreign
entity'
scashflows
directly
affecttheparent
scash
flows
and
are
readily
available
forremittance
tothe
parentfirm;ii)
thesales
prices
for
the
foreign
entity'
sproductsare
responsiveonashort-term
basisto
exchangerate
changes,
wheresalespricesaredeterminedthroughworldwidecompetition;and,iii)thesales
marketisprimarilylocatedintheparent'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.
both
Answer:
Sinceitis,generally,notpossibletocompletelyeliminatetransactionandtranslationexposure,werecommendthattransactionexposurebegivenfirstprioritysinceitinvolvesrealcashflows.Thetranslationprocess,on-the-otherhand,hasnodirecteffectonreportingcurrencycashflows,andwillonlyhavearealizableeffectonnetinvestmentuponthesaleorliquidationoftheassets.
Therearetwocommonmethodsforcontrollingtranslationexposure:
abalancesheethedgeandaderivativeshedge.Thebalancesheethedgeinvolvesequatingtheamountofexposedassetsinanexposurecurrencywiththeexposedliabilitiesinthatcurrency,sothenetexposureiszero.Thuswhenanexposurecurrencyexchangeratechangesversusthereportingcurrency,thechangeinassetswilloffsetthechangein
ratheraspeculativeposition,sincethesizeoftheexpectedspotrateofexchangefortheexposurecurrencywiththereportingcurrency.
Iftheactualspotratediffersfromtheexpectedrate,the“hedge”mayresultin
thelossofrealcashflows.
PROBLEMS
1.AssumethatFASB8isstillineffectinsteadofFASB52.Constructa
translationexposurereportforCentraliaCorporationanditsaffiliatesthatisthe
counterparttoExhibit10.7inthetext.Centraliaanditsaffiliatescarry
inventoryandfixedassetsonthebooksathistoricalvalues.
Solution:
ThefollowingtableprovidesatranslationexposurereportforCentralia
CorporationanditsaffiliatesunderFASB8,whichisessentiallythetemporalmethod
oftranslation.ThediffereneebetweenthenewreportandExhibit10.7isthat
nonmonetaryaccountssuchasinventoryandfixedassetsaretranslatedatthe
historicalexchangerateiftheyarecarriedathistoricalcosts.Thus,these
accountswillnotchangevalueswhenexchangerateschangeandtheydonotcreatetranslationexposure.
ExaminationofthetableindicatesthatunderFASB8thereisnegativenet
exposurefortheMexicanpesoandtheeuro,whereasunderFASB52thenetexposureforthesecurrenciesispositive.Thereisnochangeinnetexposureforthe
CanadiandollarandtheSwissfranc.Consequently,iftheeurodepreciatesagainst
thedollarfrom?
1.1000/$1.00to?
1.1786/$1.00,asthetextexampleassumed,
exposedassetswillnowfallinvaluebyasmalleramountthanexposedliabilities,
insteadofviceversa.Theassociatedreportingcurrencyimbalaneewillbe$239,415,
calculatedasfollows:
ReportingCurrencyImbalance=
TranslationExposureReportunderFASB8forCentraliaandSpanishAffiliates,December31,2005(in000CurrencyUnits)
Corporation
anditsMexican
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
Exposed
CD0
Ps51,000
?
5,819
SF1,400
liabilities
Netexposure
CD200
(Ps36,000)(?
3,949)(SF1,400)
inventoryandfixedassetsonthebooksathistoricalvalues.
Solution:
ThisproblemisthesequeltoProblem1.ThesolutiontoProblem1showed
thatiftheeurodepreciatedtherewouldbeareportingcurrencyimbalaneeof
$239,415.UnderFASB8thisiscarriedthroughtheincomestatementasaforeign
table
exchangegaintotheretainedearningsonthebalancesheet.Thefollowingshowsthatconsolidatedretainedearningsincreasedto$4,190,000from$3,950,000inExhibit10.8.Thisisanincreaseof$240,000,whichisthesameasthereportingcurrencyimbalanceafteraccountingforroundingerror.
ConsolidatedBalaneeSheetunderFASB8forCentraliaCorporationanditsMexicanand
SpanishAffiliates,December31,2005:
Post-ExchangeRateChange(in000Dollars)
CentraliaCorp.
Mexican
Spanish
Consolidated
(parent)
Affiliate
Affiliate
Balanee
Sheet
Assets
Cash
$950a
$600
$700
$2,250
Accountsreceivable
1,450b
900
887
3,237
Inventory
3,000
1,500
1,500
6,000
InvestmentinMexican
affiliate
c
-
-
-
InvestmentinSpanish
affiliate
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
Totalliabilitiesand
$29,087
networth
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,dInvestmentinaffiliatescancelswiththenetworthoftheaffiliatesinthe
consolidation.
e
TheSpanishaffiliateowesaSwissbankSF375,000(—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”withan
optioncontract.
grossprofitof$110,704.Theputoptioncost$33,286(=?
3,782,468x$0.0088).
Thus,atanexchangerateof?
1.1786/$1.00,theputoptionwilleffectivelyhedge
$110,704-$33,286=$77,418ofthepotentialtranslationloss.Atterminalexchange
ratesof?
1.1393/$1.00to?
1.1786/$1.00,theputoptionhedgewillbeless
the“hedge”willlosethe$33,286costoftheoption.
MINICASE:
SUNDANCESPORTINGGOODS,INC.
SundanceSportingGoods,Inc.,isaU.S.manufacturerofhigh-qualitysportinggoods--principallygolf,tenni
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