國(guó)際財(cái)務(wù)管理課后習(xí)題答案chapter

國(guó)際財(cái)務(wù)管理課后習(xí)題答案chapterCHAPTER10MANAGEMENTOFTRANSLATIONEXPOSURESUGGESTEDANSWERSANDSOLUTIONSTOEND-OF-CHAPTERQUESTIONSANDPROBLEMSQUESTIONS1.Explainthedifferenceinthetranslationprocessbetweenthemonetary/nAnswer:Underthemonetary/nonmonetarymethod,allmonetarybalancesheettranslatedatthecurrentexchangerate.Otherbalancesheetaccountsaretranslatedeffectwhentheaccountwasfirstrecorded.Underthetemporalmethod,monetaryexchangerate.Otherbalancesheetaccountsarealsotranslatedatthecurrentrate,value.Iftheyarecarriedathistoricalvalue,theyaretranslatedattherateiSincefixedassetsandinventoryareusuallycarriedathistoricalcosts,methodwilltypicallyprovidethesametranslation.2.Howaretranslationgainsandlosseshandleddifferentlyaccordingthreemethods,thatis,thecurrent/noncurrentmethod,themonetary/nonmonetaryAnswer:Underthecurrentratemethod,translationgainsandlossesarehandanequityaccountnamedthe“cumulativetranslationadjustment”account.Neotherthreetranslationmethodspassforeignexchangegainsorlossesthrotothebalancesheetthroughtheaccumulatedretainedearningsaccount.3.IdentifysomeinstancesunderFASB52whenaforeignentity’sfucurrency.Answer:ThreeexamplesunderFASB52,wheretheforeignentity’sfunctiocurrency,are:i)theforeignentity’scashflowsdirectlyaffecttheparent’theparentfirm;ii)thesalespricesfortheforeignentity’sproductsarerchanges,wheresalespricesaredeterminedthroughworldwidecompetition;antheparent’scountryorsalescontractsaredenominatedintheparent’scurrency4.DescribetheremeasurementandtranslationprocessunderFASB52ofalocalcurrencyofthecountryinwhichitoperates,whichisdifferentthanAnswer:Foraforeignentitythatkeepsitsbooksinitslocalcurrency,translationprocessaccordingtoFASB52isto:first,remeasurethefinacurrencyusingthetemporalmethodoftranslation,andsecond,translatefrcurrencyusingthecurrentratemethodoftranslation.5.Itis,generally,notpossibletocompletelyeliminatebothtranslatitheeliminationofoneexposurewillalsoeliminatetheother.Butinocreatestheother.Discusswhichexposuremightbeviewedasthemostimporcontrollingbotharises.Also,discussandcritiquethecommonmethodsAnswer:Sinceitis,generally,notpossibletocompletelyeliminatebthattransactionexposurebegivenfirstprioritysinceitinvolvesrealcahasnodirecteffectonreportingcurrencycashflows,andwillonlyhavliquidationoftheassets.Therearetwocommonmethodsforcontrollingtranslationexposure:abalabalancesheethedgeinvolvesequatingtheamountofexposedassetsinanthatcurrency,sothenetexposureiszero.Thuswhenanexposurecurrencycurrency,thechangeinassetswilloffsetthechangeinliabilities.Toexposurehasbeencontrolled,oftenmeanscreatingnewtransactionexposurcanresult.Aderivativeshedgeisnotreallyahedge,butratheraspeculaonthefutureexpectedspotrateofexchangefortheexposurecurrencywiththediffersfromtheexpectedrate,the“hedge”mayresultinthelossofreal

PROBLEMS1.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=-€3,949,0000€1.1786/$1.00--€3,949,0000€1.1000/$1.00=$239,415.TranslationExposureReportunderFASB8forCentraliaCorporationanditsMexicanandSpanishAffiliates,December31,2005(in000CurrencyUnits)CanadianDollarMexicanPesoEuroSwissFrancAssetsCashCD200Ps6,000€825SF0Accountsreceivable09,0001,0450Inventory0000Netfixedassets000ExposedassetsCD200Ps15,000€1,870SF0LiabilitiesAccountspayableCD0Ps7,000€1,364SF0Notespayable017,0009351,400Long-termdebt027,0003,520ExposedliabilitiesCD0Ps51,000€5,819SF1,400NetexposureCD200(Ps36,000)(€3,949)(SF1,400)2.AssumethatFASB8isstillineffectinsteadofFASB52.ConstructaconsolidatedbalancesheetforCentraliaCorporationanditsaffiliatesafteradepreciationoftheeurofrom€1.1000/$1.00to€1.1786/$1.00thatisthecounterparttoExhibit10.8in

thetext.Centraliaanditsaffiliatescarryinventoryandfixedassetsonthebooksathistoricalvalues.Solution:ThisproblemisthesequeltoProblem1.ThesolutiontoProblem1showedthatiftheeurodepreciatedtherewouldbeareportingcurrencyimbalanceof$239,415.UnderFASB8thisiscarriedthroughtheincomestatementasaforeignexchangegaintotheretainedearningsonthebalancesheet.Thefollowingtableshowsthatconsolidatedretainedearningsincreasedto$4,190,000from$3,950,000inExhibit10.8.Thisisanincreaseof$240,000,whichisthesameasthereportingcurrencyimbalanceafteraccountingforroundingerror.ConsolidatedBalanceSheetunderFASB8forCentraliaCorporationanditsMexicanandaThisincludesCD200,000theparentfirmhasinaCanadianbank,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,theequivalentamountinfunctionalcurrencythatneedstobehedgedis€3,782,468.Ifinfacttheeurodoesdepreciateto€1.1786/$1.00($0.8485/€1.00),€3,782,468canbepurchasedinthespotmarketfor$3,209,289.Atastrikingpriceof€1.1393/$1.00,the€3,782,468canbesoldthroughtheputfor$3,319,993,yieldingagrossprofitof$110,704.Theputoptioncost$33,286(=€3,782,468x$0.0088).Thus,atanexchangerateof€1.1786/$1.00,theputoptionwilleffectivelyhedge$110,704-$33,286=$77,418ofthepotentialtranslationloss.Atterminalexchangeratesof€1.1393/$1.00to€1.1786/$1.00,theputoptionhedgewillbelesseffective.Anoptioncontractdoesnothavetobeexercisedifdoingsoisdisadvantageoustotheoptionowner.Therefore,theputwillnotbeexercisedatexchangeratesoflessthan€1.1393/$1.00(morethan$0.8777/€1.00),inwhichcasethe“hedge”willlosethe$33,286costoftheoption.MINICASE:SUNDANCESPORTINGGOODS,INC.SundanceSportingGoods,Inc.,isaU.S.manufacturerofhigh-qualitysportinggoods--principallygolf,tennisandotherracquetequipment,andalsolawnsports,suchascroquetandbadminton--withadministrativeofficesandmanufacturingfacilitiesinChicago,Illinois.Sundancehastwowhollyownedmanufacturingaffiliates,oneinMexicoandtheotherinCanada.TheMexicanaffiliateislocatedinMexicoCityandservicesallofLatinAmerica.TheCanadianaffiliateisinTorontoandservesonlyCanada.Eachaffiliatekeepsitsbooksinitslocalcurrency,whichisalsothefunctionalcurrencyfortheaffiliate.Thecurrentexchangeratesare:$1.00=CD1.25=Ps3.30=A1.00=￥105=W800.ThenonconsolidatedbalancesheetsforSundanceanditstwoaffiliatesappearintheaccompanyingtable.NonconsolidatedBalanceSheetforSundanceSportingGoods,Inc.andItsMexicanandaTheparentfirmisowedPs1,320,000bytheMexicanaffiliate.Thissumisincludedintheparent’saccountsreceivableas$400,000,translatedatPs3.30/$1.00.Theremainderoftheparent’s(Mexicanaffiliate’s)accountsreceivable(payable)isdenominatedindollars(pesos).bTheMexicanaffiliateiswhollyownedbytheparentfirm.Itiscarriedontheparentfirm’sbooksat$2,400,000.Thisrepresentsthesumofthecommonstock(Ps4,500,000)andretainedearnings(Ps3,420,000)ontheMexicanaffiliate’sbooks,translatedatPs3.30/$1.00.cTheCanadianaffiliateiswhollyownedbytheparentfirm.Itiscarriedontheparentfirm’sbooksat$3,600,000.Thisrepresentsthesumofthecommonstock(CD2,900,000)andtheretainedearnings(CD1,600,000)ontheCanadianaffiliate’sbooks,translatedatCD1.25/$1.00.dTheparentfirmhasoutstandingnotespayableof￥126,000,000dueaJapanesebank.Thissumiscarriedontheparentfirm’sbooksas$1,200,000,translatedat￥105/$1.00.OthernotespayablearedenominatedinU.S.dollars.eTheMexicanaffiliatehassoldonaccountA120,000ofmerchandisetoanArgentineimporthouse.ThissumiscarriedontheMexicanaffiliate’sbooksasPs396,000,translatedatA1.00/Ps3.30.OtheraccountsreceivablearedenominatedinMexicanpesos.fTheCanadianaffiliatehassoldonaccountW192,000,000ofmerchandisetoaKoreanimporter.ThissumiscarriedontheCanadianaffiliate’sbooksasCD300,000,translatedatW800/CD1.25.OtheraccountsreceivablearedenominatedinCanadiandollars.YoujoinedtheInternationalTreasurydivisionofSundancesixmonthsagoafterspendingthelasttwoyearsreceivingyourMBAdegree.ThecorporatetreasurerhasaskedyoutoprepareareportanalyzingallaspectsofthetranslationexposurefacedbySundanceasaMNC.Shehasalsoaskedyoutoaddressinyouranalysistherelationshipbetweenthefirm’stranslationexposureanditstransactionexposure.Afterperformingaforecastoffuturespotratesofexchange,youdecidethatyoumustdothefollowingbeforeanysensiblereportcanbewritten.a.UsingthecurrentexchangeratesandthenonconsolidatedbalancesheetsforSundanceanditsaffiliates,prepareaconsolidatedbalancesheetfortheMNCaccordingtoFASB52.b.i.PrepareatranslationexposurereportforSundanceSportingGoods,Inc.,anditstwoaffiliates.ii.Usingthetranslationexposurereportyouhaveprepared,determineifanyreportingcurrencyimbalancewillresultfromachangeinexchangeratestowhichthefirmhascurrencyexposure.Yourforecastisthatexchangerateswillchangefrom$1.00=CD1.25=Ps3.30=A1.00=￥105=W800to$1.00=CD1.30=Ps3.30=A1.03=￥105=W800.c.PrepareasecondconsolidatedbalancesheetfortheMNCusingtheexchangeratesyouexpectinthefuture.DeterminehowanyreportingcurrencyimbalancewillaffectthenewconsolidatedbalancesheetfortheMNC.d.i.PrepareatransactionexposurereportforSundanceanditsaffiliates.Determineifanytransactionexposuresarealsotranslationexposures.ii.InvestigatewhatSundanceanditsaffiliatescandotocontrolitstransactionandtranslationexposures.Determineifanyofthetranslationexposureshouldbehedged.SuggestedSolutiontoSundanceSportingGoods,Inc.NotetoInstructor:Itisnotnecessarytoassigntheentirecaseproblem.Partsa.andb.i.canbeusedasself-containedproblems,respectively,onbasicbalancesheetconsolidationandthepreparationofatranslationexposurereport.a.BelowistheconsolidatedbalancesheetfortheMNCpreparedaccordingtothecurrentratemethodprescribedbyFASB52.Notethatthebalancesheetbalances.Thatis,TotalAssetsandTotalLiabilitiesandNetWorthequaloneanother.Thus,theassumptionisthatthecurrentexchangeratesarethesameaswhentheaffiliateswereestablished.Thisassumptionisrelaxedinpartc.ConsolidatedBalanceSheetforSundanceSportingGoods,Inc.itsMexicanandCanadianAffiliates,December31,2005:Pre-ExchangeRateChange(in000Dollars)Sundance,Inc.MexicanAffiliateCanadianAffiliateConsolidatedBalancea$2,500,000-$400,000(=Ps1,320,000/(Ps3.30/$1.00))intracompanyloan=$2,100,000.b,cTheinvestmentintheaffiliatescancelswiththenetworthoftheaffiliatesintheconsolidation.dTheparentowesaJapanesebank￥126,000,000.Thisiscarriedonthebooksas$1,200,000(=￥126,000,000/(￥105/$1.00)).eTheMexicanaffiliatehassoldonaccountA120,000ofmerchandisetoanArgentineimporthouse.ThisiscarriedontheMexicanaffiliate’sbooksasPs396,000(=A120,000xPs3.30/A1.00).fTheCanadianaffiliatehassoldonaccountW192,000,000ofmerchandisetoaKoreanimporter.ThisiscarriedontheCanadianaffiliate’sbooksasCD300,000(=W192,000,000/(W800/CD1.25)).b.i.BelowispresentedthetranslationexposurereportfortheSundanceMNC.Note,fromthereportthatthereisnetpositiveexposureintheMexicanpeso,Canadiandollar,ArgentineaustralandKoreanwon.Ifanyoftheseexposurecurrenciesappreciates(depreciates)againsttheU.S.dollar,exposedassetsdenominatedinthesecurrencieswillincrease(fall)intranslatedvaluebyagreateramountthantheexposedliabilitiesdenominatedinthesecurrencies.ThereisnegativenetexposureintheJapaneseyen.Iftheyenappreciates(depreciates)againsttheU.S.dollar,exposedassetsdenominatedintheyenwillincrease(fall)intrans