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none of these, since a perfect hedge is nearly impossible.

A perfect hedge (full coverage) on translation exposure can usually be achieved when:

liability, matches

An MNC expects to sell fixed assets it utilizes in Europe in the distant future. In order to hedge the sale of these assets in the distant future, the MNC could create a(n) _______ that _______ the expected value of the assets in the future.

less; fewer

An MNC is attempting to reduce its economic exposure by financing a portion of its business with loans in the foreign currency. If the foreign currency weakens, the MNC will need _______ of the foreign currency to cover the loan payment, while the MNC's foreign currency revenues will convert to _______ dollars.

income statement

An effective way for an MNC to assess its economic exposure is to look at the firm's

reduces; reduce

Any restructuring of operations that _______ the difference between a foreign currency's inflows and outflows may _______ economic exposure

long term

As opposed to transaction exposure, managing economic exposure involves developing a _______ solution

loss; larger

Assume a U.S. firm uses a forward contract to hedge all of its translation exposure. Also assume that the firm underesti¬mated what its foreign earnings would be. Assume that the foreign currency depreciated over the year. The firm would generate a translation _______, which would be _______ than the gain generated by the forward contract.

producing more automobiles in the U.S.

Assume that a Japanese car manufacturer exports cars to U.S. dealerships, which are priced in yen. The demand for those cars declines when the yen is strong. The manufacturer also produces some cars in the U.S. with U.S. materials and those cars are priced in dollars. The manufacturer could reduce its economic exposure by:

positive, positively

Cierra, Inc. is attempting to assess its degree of economic exposure in euros. In order to do so, it has applied regression analysis to determine whether the percentage change in its total cash flow is related to the percentage change in the euro. A _______ and statistically significant slope coefficient resulting from this analysis implies that the cash flows are _______ related to the percentage changes in the euro.

be reduced; selling

Depreciation of the euro relative to the U.S. dollar will cause a U.S.-based multinational firm's reported earnings (from the consolidated income statement) to _______. If a firm desired to protect against this possibility, it could stabilize its reported earnings by _______ euros forward in the foreign exchange market

benefit; strengthens

If a U.S. firm's expenses are more susceptible to exchange rate movements than revenue, the firm will _______ if the dollar _______.

none of these

If a firm is subject to _______, then it must be subject to translation exposure.

cash inflows match cash outflows in each foreign currency

If revenues and costs are equally sensitive to exchange rate movements, MNCs may reduce their economic exposure by restructuring their operations to shift the sources of costs or revenues to other locations so that

favorably affected

If the Singapore dollar appreciates against the U.S. dollar over this year, the consolidated earnings of a U.S. company with a subsidiary in Singapore will be _______ as a result of the exchange rate movement.

transaction exposure

It is generally least difficult to effectively hedge various types of:

decreasing foreign expenses; increasing foreign revenues

Laketown Co. has some expenses and revenue in euros. If its expenses are more sensitive to exchange rate movements than revenue, it could reduce economic exposure by _______. If its revenues are more sensitive than expenses, it could reduce economic exposure by _______.

more difficult

Managing economic exposure is generally perceived to be _______ managing transaction exposure

Neither of these is true.

Rockford Co. is a U.S. manufacturing firm that produces goods in the U.S. and sells all products to retail stores in the U.K.; the goods are denominated in pounds. It finances a small portion of its business with pound denominated loans from British banks. Which of the following is true? (Assume that the amount of products to be sold is guaranteed by contracts.)

benefit from; be adversely affected by

Springfield Co., based in the U.S., has a cost from orders of foreign material that exceeds its foreign revenue. All foreign transactions are denominated in the foreign currency of concern. This firm would _______ a stronger dollar and would _______ a weaker dollar.

increase; high

Sycamore (a U.S. firm) has no subsidiaries and presently has sales to Mexican customers amounting to MXP98 million, while its peso denomin¬ated expenses amount to MXP41 million. If it shifts its material orders from its Mexican suppliers to U.S. suppliers, it could reduce peso denominated expenses by MXP12 million and increase dollar denominated expenses by $800,000. This strategy would _______ the Sycamore's exposure to changes in the peso's movements against the U.S. dollar. Regardless of whether the firm shifts expenses, it is likely to perform better when the peso is valued _______ relative to the dollar.

tax deductible, taxed

Translation losses are _______, while gains on forward contracts used to hedge translation exposure are _______.

all of these firms are exposed to translation exposure

Which of the following firms is not exposed to translation exposure?

an increase in the dollar's value hurts a U.S. firm's domestic sales because foreign competitors are able to increase their sales to U.S. customers.

Which of the following is an example of economic exposure but not an example of transaction exposure?

increase; decrease

Whitewater Co. is a U.S. company with sales to Canada amount¬ing to C$8 million. Its cost of materials attributable to the purchase of Canadian goods is C$6 million. Its interest expense on Canadian loans is C$4 million. Given these exact figures above, the dollar value of Whitewater's "earnings before interest and taxes" would _______ if the Canadian dollar appreciates; the dollar value of Whitewater's cash flows would _______ if the Canadian dollar appreciates.

increase Zambian sales

Wisconsin Inc. conducts business in Zambia. Years ago, Wisconsin established a subsidiary in Zambia that has consistently generated very large profits denominated in Zambian kwacha. Wisconsin wishes to restructure its operations to reduce economic exposure. Which of the following is not a feasible way of accomplishing this?

are not tax deductible; are taxed

With regard to hedging translation exposure, translation losses _______; and gains on forward contracts used to hedge translation exposure _______.

Inaccurate stock price forecasts

__ is not a limitation of hedging translation exposure

Economic exposure

____ represents any impact of exchange rate fluctuations on a firm's future cash flows.

translation

_______ exposure occurs when an MNC translates each subsidiary's financial data to its home currency for consolidated financial statements

sell the currency forward

to hedge translation exposure, MNCs could _______ that their foreign subsidiaries receive as earnings to create a cash outflow in the currency to offset the earnings received in that currency