International Financial Management Trial Exam Closed Book Examination INCLUDEPICTURE uvafileserverjligter1DataOnderwijsInternational Financeif2008sbriederLocal SettingsTempRarDI04.890ABS-logo.gif MERGEFORMAT Closed Book Examination Answer as brief and concise as possible redundant or superfluous remarks may lead to a lower score. The maximum score per problem is given between parentheses. The maximum score of the whole exam is 100 points. QUESTION 1 - 20 points SHAPE MERGEFORMAT This graph depicts the REAL value of the broad index which is a weighted average of the foreign exchange values of the U.S. dollar against the currencies of a large group of major U.S. trading partners. a) Consider the following table of price levels,
Assume now that the Accounting Standards Board does not accept this and that as a result the Pound is the functional currency of the UK subsidiary. Explain using a simplified balance sheet what in that case the accounting exposure is of the subsidiary. 4 points Show a balance sheet all items except equity need to be translated against closing rate. Hence USS has an accounting exposure with respect to equity on the balance sheet. Generally corporations do not hedge their accounting exposure. Under which conditions hedging accounting exposure becomes important. 4 points Hedging accounting exposure becomes primarily important when a firm gets close to breaking its covenants due to weakened financial ratios (especially Debt/equity). Also when firm is considering selling the subsidiary hedging may make sense to prevent volatility in accounting earnings. Given that the market was dollar driven and that the UK subsidiary of USS was competing with other firms that manufacture their chips in the US. Does USS have any operating exposure Explain why 4 points All competitors face same exposure and the market is dollar driven. If / increases in real terms,