CHAPTER 10
Measuring and Managing Translation and Transaction Exposure

EASY (definitional)

10.1 ___________ 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

Ans: c
Section: Alternative measures of foreign exchange exposure
Level: Easy

10.2 Hedging cannot provide protection against ________ exchange rate changes.
a) expected
b) nominal
c) real
d) pegged

Ans: a
Section: Designing a hedging strategy
Level: Easy

10.3 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

Ans: c
Section: Designing a hedging strategy
Level: Easy

10.4 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

Ans: c
Section: Alternative currency translation methods
Level: Easy

10.5 The current standard for measuring translation exposure is
a) the current/noncurrent method
b) the monetary/nonmonetary method
c) FASB 8
d) FASB 52

Ans: d
Section: Statement of financial accounting standards No. 52
Level: Easy

10.6 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

Ans: c
Section: Statement of financial accounting standards No. 52
Level: Easy

10.7 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

Ans: a
Section: Designing a hedging strategy
Level: Easy

10.8 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

Ans: d
Section: Centralization versus decentralization
Level: Easy

10.9 In a forward market hedge, a company that is long a foreign currency will _______ the foreign currency forward, whereas a company that is short a foreign currency will _______ the currency forward.
a) buy; sell
b) sell; buy
c) borrow; sell
d) lend; buy

Ans: b
Section: Managing a Transaction Exposure
Level: Easy

10.10 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

Ans: c
Section: Money-market hedge
Level: Easy

10.11 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

Ans: b
Section: Exposure netting
Level: Easy

MEDIUM (applied)

10.12 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