If the British subsidiary of a European firm has net exposed assets of £250,000, and the pound drops in value from euro 1.40/£ to euro 1.30/£, the European firm has a translation……….. .

A. The foreign subsidiary is about to be liquidated, so that the value of its Cumulative Translation Adjustment (CTA) would be realized.

B. The firm has debt covenants or bank agreements that state the firm's debt/equity ratio will be maintained within specific limits.

C. The foreign subsidiary is operating is a hyperinflationary environment.

D. All of the above are appropriate reasons to use a balance sheet hedge.

A. the net exposed position is called monetary balance.

B. the change is value of liabilities and assets due to a change in exchange rates will be of equal but opposite direction.

C. both B and C are true.

D. none of the above.

A. 10% foreign exchange loss on the U.S. dollar accounts receivable.

B. 10% foreign exchange gain on the U.S. dollar accounts receivable.

C. since the Canadian firm is a U.S. subsidiary neither a gain nor loss will be recorded.

D. any gain or loss will be recoded only by the parent firm.

A. transaction

B. operating

C. translation

D. money market

A. gain of $50,000

B. loss of $50,000

C. gain of $450,000

D. loss of euro 450,000

B. may move funds from cash into plant and equipment.

C. may try to decrease net exposed assets in that country.

D. may try to increase net exposed assets in that country.

A. A U.S based manufacturing firm with a fully owned subsidiary that generates earnings in Japan. The subsidiary always keeps and reinvests the earnings.

B. A U.S. based retailer with a fully owned subsidiary in Canada that generates losses in Canada that the parent firm occasionally covers.

C. A U.S. based firm with a subsidiary in Britain that occasionally remits earnings to the parent firm.

D. All of the above are subject to translation exposure.