国际财务管理课后习题答案chapter10-.pdf

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1、QUESTIONS CHAPTER 10 MANAGEIENT OF TRANSLATION EXPOSURE SUGGESTED ANSWERS AND SOLUTIONS TO END-OF-CHAPTER QUESTIONS AND PROBLElilS 1.Explain the difference in the translation process between the monetary/nonmonetary 1 nethod and the te1nporal rnethod.Answer:Under the monetary/norunonetary m巳thod,all

2、 111onetary balance sheet ace咀untsof a foreign subsidiary are translated at the current exchaige rate.Other balance sheet accounts are translated at the historical rate exchang巳ratein effect when the account was first recorded.Under the te1nporal method,1nonetary accounts are translated at the curre

3、nt exchange rate.Other balance sheet accounts are also translated at the current rate,if they are carried on the books at current value.If they are carried at historical value,they are translated at the rate in effect on the date the item was put on the books.Since fixed assets and inventory are usu

4、ally carried at historical costs,the te1nporal 1nethod and th巳1nonetary/nonmonetary method will typically provide the sa1ne translation.2.How are translation gains ai1d losses handled differently according to the current rate 1nethod in comparison to the other three methods.that is.the current/noncu

5、rrent rnethod,the monetary/nonmonetary 1nethod,and the te1nporal method?Answer:Under the current rate method,trai1slation gains and losses are handled only as an adjustment to net,vorth through an equity account named the“cumulative translation呻ustment”account.Nothing passes through the income state

6、1nent.The other three translation methods pass foreign exchange gains or losses through the income staternent before they enter on to the balai1ce sheet through the accumulated retained earnings account.3.Identify sorne instances under FASB 52 when a foreign entitys functional ctu1守ncyVotlld be the

7、s挝neas the parent firms cun芭且cy.Ansver:Tluee ex缸nplestlllder FASB 52,vhere the foreign entitys如nctionalctuTency will be the same as the parent fums ctmency,are:i)the foreign entitys cash flo,vs directly affect the parents cash flo,vs and are readily available for remittance to the parent finn;ii)the

8、 sales pric臼forthe foreign entitys products are responsive on a short-tenn basis to exchange rate changes,wh巳resales prices are detennined through world,vide competition;a时，iii)the sales market is primarily located in the pare邸Scotmtry or sales co且也actsare denominated in the par酬sctmency.4.Describe

9、the ren1easure1nent and translation process under FASB 52 of a wholly owned对frliatethat keeps its books in the local currency of the country in which it operates,which is different than its functional currency.Answer:For a foreign entity that keeps its books in its local cu巳ncy,which is different fr

10、om its functional currency,the translation process according to FASB 52 is to:first,remeasure th巳financialreports from the local currency into the functional currency using the ternporal rnethod of translation,and sec咀nd,translate from the functional cu町encyinto the r巳portingcu汀encyusing the cuent r

11、ate method of translation.5.It is,generally,not possible to cornpletely eliminate both translation exposure and transaction exposure.In sorne cases,the elimination of one 巳xposurewill also eliminate the other.But in other cases,the elimination of one exposure actually creates the other.Discuss which

12、 exposure,night be vi巳wedas the rnost irnportant to effectively manage,if a conflict between controlling both arises.Also,discuss and critique the co1 nmon methods for controlling translation exposure.Answer:Since it is,generally,not possible to co1npletely eliminate both transaction and translation

13、 exposure,we reco1n1 nend that transaction exposure be given first priority since it involves real cash flows.The translation process,on-the-other hand,has no direct effect on reporting currency cash flows.and will only have a realizable effect on net investment upon the sale or liquidation of the a

14、ssets.There are two cornrnon methods for controll川gtranslation exposure:a balance sheet hedge and a derivatives hedge.Th巳balancesheet hedge involves equating the amount of exposed assets in an exposure currency with the exposed liabilities in that currency,so the net exposure is zero.Thus when an ex

15、posure currency exchange rate changes versus the reporting currency,the change in assets will o仔setthe change in liabilities.To create a balance sheet hedge,once transaction exposure has been controlled,often means creating n巳Wtransaction exposure.1、“isnot wise since real cash flow losses can result

16、.A deri飞1ativeshedge is not really a hedge,but rather a speculative position,since the size of the“hedge”is based on the future expected spot rate of exchange for the exposure currency with the reporting cu巳ncy.If the actt国lspot rate differs f沁Illthe expected rate,the hedge”may result in the loss of

17、 real cash flo,vs.PROBLEMS I.Assurne that FASB 8 is still in effect instead of FASB 52.Constnrct a translation exposure report for Centralia Corporation and its affiliates that is the counterpart to Exhibit 10.7 in the text.Centralia and its affiliates carry inventory and fixed assets on the books a

18、t historical values.Solution:The following table provides a translation exposure report for Centralia Corporation and its affiliates under FASB 8,which is essentially the ternporal method of translation.The difference b古tweenthe new report and Exhibit I 0.7 is that nonmonetary accounts such as inven

19、tory and fixed assets are translated at the historical excharge rate if they are carried at historical costs.Thus,these accounts will not change values when巳xchangerates change and they do not create translation巳xposure.Exarnination of the table indicates that under FASB 8 there is negative net expo

20、sure for the Mexican peso and the euro,whereas under FASB 52 the net exposure for these currencies is positive.There is no change in net exposure for the Canadian dollar arid the Swiss franc.Consequently,if the euro depreciates against the dollar from1.1000/$1.00 to苞1.1786/$1.00,as the text example

21、assumed,exposed assets will now fall in value by a smaller arnount than exposed liabilities,instead of vice versa.The associated reporting currency imbalance will be$239,415,calculated as follows:Reporting Currency lrnbalance=-3,949,0000 1.17861$1.00 AU AU 川J”凡川V白eAW呐川VEJJ，l户AUAYEAU du7明AUAY町，JJ-rE臼

22、$239,415.Translation Exposure Report under FASB 8 for Centralia Corporation and its Mexican and Spanish Affiliates,December匀，2005(in 000 Currency Units)Canadian Mexican Swiss Dollar Peso Euro Franc Asse1s Cash CD200 Ps 6,000 825 SF。Accounts receivable。9,000 1,045。Inventory。Net fixed assets。Exposed a

23、ssets CD200 PslS,000 1,870 SF。Liabilities Accounts payable CD O Ps 7,000 1,364 SF。Notes payable。17,000 935 1,400 Long-tenn debt。27,000 3,520。Exposed liabilities CD O PsS 1,000 5,819 SFl,400 Net exposure CD200(Ps36,000)（3,949)(SFl,400)2.Assu,ne that FASB 8 is still in eff，巳ctinstead of FASB 52.Constn

24、rct a consolidated balance sheet for Centralia Corporation and its affiliates after a depreciation of the etuo from 1.1000/$1.00 to 1.1786/$1.00 that is the counterpart to Exhibit 10.8 in the text.Centralia and its affiliates carry inventory and fixed assets on the books at historical values.Solutio

25、n:This problern is the sequel to Problem 1.The solution to Problern I showed that if the euro depreciated there would be a reporting currency irnbalance of$239,415.Under FASB 8 this is caied through the income statem巳ntas a foreign exchange gain to the retained earnings on the balance sheet.The foll

26、owing table shows that consolidated retained earnings increased to$4,190,000 frorn$3,950,000 in Exhibit 10.8.This is an increase of$240,000,which is the same as the reporting currency imbalance after accounting for rounding cor.Consolidated Balance Sheet under FASB 8 for Central盹Corporationand its M

27、exican and Spanish Affiliates,December 31,2005:Post-Exchan.ge Rate Chan.ge(in 000 Dollars)Assets Cash Accounts receivable Inventory Investment in Mexican a仔iliateInvestment in Spanish affiliate Net fixed assets Total assets Liabilities and Net Worth Accounts payable Notes payable Long-term debt Co1n

28、1non stock Retained earnings Total liabilities and net worth Centralia Corp.(parent)$950 I,450b 3,000 c d 9,000$1,800 2,200 7,110 3,500 4,190 Mexican Affiliate$600 900 1,500 4,600$700b 1,700 2,700 c Spanish Affiliate$700 887 J,500 4,000$1,157 1,043 2,987 d d Consolidated Balance Sheet$2,250 3,237 6,

29、000 17.600$29,087$3,657 4,943 12,797 3,500 4.190$29,087 This includes CD200,000 the parent finn has in a Canadian baikcarried as$150,000.CD200,000/(CD 1.3333/$1.00)=$150,000.b$1,750,000-$300,000(=Ps3,000,000/(Ps10.00/$1.00)intraco1 npany loan=$1,450,000.c.dJnvestment in affiliates cancels with the n

30、et worth of the affiliates in the consolidation.The Spanish affiliate owes a Swiss bank SF375,000(+SF 12727f,芭100294,649).This is carried on the books after the exchange rate change,as part of1,229,649 芭294,649芭935,000.苞1,229,649（11786/$100)=$1,043,313.3.In Exa1nple 10.2,a fonvard contract,vas used

31、to establish a derivatives“hedge”to protect Centralia 企oma trauslatio日loss if the etuo depreciated台。m1.1000/$1.00 to 1.1786/$1.00.Assume that au over-the-cotmter put option 011 the euro Vith a strike price of 1.1393/$1.00(or$0 87771在1.00)can be pt町chasedfor$0.0088 per euro.Shov how the potential tra

32、nslation loss can be“hedged”,vith au option contract.Solution:As in exa,nple 10.2,if the potential translation Joss is$110,704,the equivalent amount in functional cturency that needs to be hedged is 3,782,468.If i日factthe euro does depreciate to l 1786/$1.00($0.8485/1.0时，3,782,468can be purch描edin t

33、he spot market for$3,209,289.At a striking price of 1.1393/$1.00,the 3,782,468 can be sold through the put for$3,319,993,yielding a gross profit of$110,704.The put option cost$33,286(=3,782,468 x$0.0088).Tut屿，atan exchange rate of 1.1786/$1.00,the put option Viii effectively hedge$110,704-$33,286=$7

34、7,418 of the potential translation loss.At terminal exchange rates of1.1393/$1.00 to苞1.1786/$1.00,the put option hedge飞rillbe Jess effective.An option contract does not have to be exercised if doing so is disadvantageous to the option owner.Therefore,the put will not be exercised at exchange rates o

35、f less than 1.1393/$1.00(1nore than$0.87771在1.00),in Vhich case the“hedge”,vill lose the$33,286 cost of the option.MINI CASE:SUNDANCE SPORTING GOODS INC.Sundance Sporting Goods,Inc.,is a U.S.manufacturer of high-quality sporting goods-principally golf,tennis and other racquet equiprnent,and also law

36、n sports,such as croquet and badmi1ton-with administrative o仔icesand manufacturing facilities in Chicago,Illinois.Sundance has two wholly owned,nanufacturing a仔11iat邸，onein Mexico and the other in Canada.The Mexican affiliate is located in Mexico City and services all of Latin America.The Canadian a

37、ffiliate is in Toronto and serves only Canada.Each affiliate keeps its books in its local currency,which is also the functional currency for the affiliate.The current exchange rates are:$1.00=CDI.25=Ps3.30=AI.00=105=W800.The nonconsoliclated balance sheets for Sundance and its nvo a仔1 liatesappear i

38、n the accompanying table.Noncon啤olidatedBalance Sheet for Sundance Sporting Goods,Inc.and Its Mexican and Canadian Affiliates,December 31,2005(in 000 Cu汀创比yUnits)Sundance,Inc.ent)Assets Cash$1,500 Accounts receivable 2.soo Inventory 5,000 Investment in Mexican a仔iliate2,400b Investment affiliate in

39、Canadian 3 600 Net fixed assets 且,QQQTotal assets$27,000 Liabilities and Net Worth Accounts payable$3,000 Notes payable 4,000d Long-tenn debt 9,000 Co1n1non stock 5,000 Retained earnings 6,000 Total liabilities and net$27,000 worth M巳xicanCanadian Affiliate Affiliate Ps 1,420 CD 1,200 2,8ooe I 500 6

40、,200 2,500 11主2005主600Ps21 620 CDIO 800 Ps 2,500 CD 1,700 4,200 2,300 7,000 2,300 4,500b 2,900 3,420b 1,600the entire case problern.Parts a.and b.i.can be used as self-contained problems,respectively,on basic balance sh巳etconsolidation and the preparation of a translation exposure report.a.Below is

41、the consolidated balance sheet for the MNC prepared according to the current rate rnethod prescribed by FASB 52.Note that the balance sheet balances.That恼，TotalAssets and Total Liabilities and Net Worth equal one another.Thus,the assurnption is that the current exchange rates are the same as when th

42、e a仔1liateswere established.This assumption is relaxed in part c.Consolidated Balance Sheet for Sundance Sporting Goods,Inc.its Mexican and Canadian Affiliates,Dece,nber 31,2005:Pre-Exchange Rate Change(in 000 Dollars)Assets Cash Accounts receivable Inventory Sundance Inc._j)arent)$1,500 2 100 5 000

43、 Investment in Mexican b affiliate Investment in Canadian c affiliate Net fixed assets Total assets liabilities and Net Worth Accounts payable Notes payable Long-term debt Co,n,non stock Retained earnings Total liabilities and net worth 12 000$3,000 4000d 9000 5 000 6000 Mexican Affiliate$430 849 I

44、879 3,394$3583 1,273 2 121 b b Canadian Affiliate$960 1,2oor 2,000 4,480$1,360 1,840 1,840 二二Consolidated Balance Sheet$2 890 4,149 8,879 旦旦主$35,792$4,718 7,113 12 961 5,000 马盟$35,792$2,500,000-$400,000(=Psl,320,000/(Ps3.30/$1.00)intracompany loan=$2,100,000.b.cThe investment in the affiliates cance

45、ls with the net worth of the affiliates in the consolidation.The parent owes a Japanes巳bank 126,000,000.This is carried on the books as衍，200,000(=126,000,000/(105/$1.00).The Mexican affiliate has sold on account A 120,000 of merchandise to an Argentine import house.This is canied on the t1exican aff

46、iliates books as Ps396,000(=A120,000 x Ps3 30/Al.00).;The Canadian affiliate has sold on account飞N192,000,000 of rnerchandise to a Korean importer.This is canied on the Canadian affiliates books as CD300,000(=Wl92,000,000/(W800/CDl.25).b.i.Below is presented the translation exposure report for the S

47、undance MNC.Note,frorn the report that there is net positive exposure川theMexican peso,Canadian dollar,Argentine austral and Korean won.If any of these exposure currencies appreciates(depreciates)against the U.S.dollar,exposed assets deno,ninated川thesecurrencies will increase（阳I)in translated value b

48、y a greater amount than the exposed liabilities denorninated in these currenci创刊ereis negative net exposure in the Japanes巳yen.If the yen appreciates(depreciates)against the U.S.dollar,exposed assets denominated in the yen will increase(fall)in translated value by srnaller a,nount than the exposed l

49、iabilities denominated in the yen.Translation Exposure Report for Sundance Sporting Goods,Inc.and its Mexican and Canadian Affiliates,Dece,nber 31,2005(in 000 Currency Units)Japanese Mexican Canadian Argentin巳Korean Yen Peso Dollar Austral.Von Assets Cash￥。Ps 1,420 CD 1,200 AO w。Accounts receivable。

50、2,404 1,200 120 192,000 Inventory。6,200 2,500。Fixed assets。11.200 5600。Exposed assets￥。Ps21,224 CDI0,500 Al20 Wl92,000 liabilities Accounts payable￥。Ps 1,180 CD 1,700 A O w。Notes payable 126,000 4,200 2,300。Long-term debt￥。7000 2300。Exposed liabilities 126,000 Ps12,380 CD 6,300 A O w。Net exposure(12