国际财务管理系统课后习题问题详解chapter10

1、实用标准文档CHAPTER 10 MANAGEMENT OF TRANSLATION EXPOSURESUGGESTED ANSWERS AND SOLUTIONS TO END-OF-CHAPTERQUESTIONS AND PROBLEMSQUESTIONS1. Explain the difference in the translation process between the monetary/nonmonetary method and the temporal method.Answer: Under the monetary/nonmonetary method, all m

2、onetary balance sheet accounts of a foreign subsidiary are translated at the current exchange rate. Other balance sheet accounts are translated at the historical rate exchange rate in effect when the account was first recorded. Under the temporal method, monetary 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

4、 usually carried at historical costs, the temporal method and the monetary/nonmonetary method will typically provide the same translation.2. How are translation gains and losses handled differently according to the current rate method in comparison to the other three methods, that is, the current/no

5、ncurrent method, the monetary/nonmonetary method, and the temporal method?Answer: Under the current rate method, translation gains and losses are handled only as an adjustment to net worth through an equity account named the “ cumulativetranslation adjustment ”account. Nothing passes through the inc

6、ome statement. Theother three translationmethods pass foreign exchange gains or losses through theincome statement beforethey enter on to the balance sheet through the accumulatedretained earnings account.3.Identifysome instancesunder FASB 52 when a foreignentitys functionals currency.currency would

7、 be the same as the parent firmAnswer:Three examples underFASB 52, where theforeignentitys functionalcurrencywill be thesame asthe parent firm scurrency,are:i)theforeignentity s cash flowsdirectlyaffect the parents cashflowsandarereadilyavailablefor remittanceto theparent firm; ii)the salespricesfor

8、theforeignentity s products areresponsive on a short-termbasis toexchange ratechanges,where sales prices are determined through worldwide competition; and, iii) the salesmarket is primarily located in the parent s country or sales contracts are denominated in the parent s currency.4. Describe the re

9、measurement and translation process under FASB 52 of a wholly owned affiliate that 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 currency, which is different fr

10、om its functional currency, the translation process according to FASB 52 is to: first, remeasure the financial reports from the local currency into the functional currency using the temporal method of translation, and second, translate from the functional currency into the reporting currency using t

11、he current rate method of translation.5. It is, generally, not possible to completely eliminate both translation exposure and transaction exposure. In some cases, the elimination of one exposure will also eliminate the other. But in other cases, the elimination of one exposure actually creates the o

12、ther. Discuss which exposure might be viewed as the most important to effectively manage, if a conflict between controlling both arises. Also, discuss and critique the common methods for controlling translation exposure.bothAnswer: Since it is, generally, not possible to completely eliminate transac

13、tion and translation exposure, we recommend 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

14、or liquidation of the assets.文案大全There are two common methods for controlling translation exposure: a balance sheet hedge and a derivatives hedge. The balance sheet hedge involves equating the amount of exposed assets in an exposure currency with the exposed liabilities in that currency, so the net

15、exposure is zero. Thus when an exposure currency exchange rate changes versus the reporting currency, the change in assets will offset the change inliabilities.To createa balance sheet hedge,once transactionexposure has beencontrolled,often means creating new transactionexposure. This is not wise si

16、ncereal cash flow losses can result.A derivativeshedge is not really a hedge, buthedge” is based on the futurerather a speculative position, since the size of the expected spot rate of exchange for the exposure currency with the reporting currency.If the actual spot rate differs from the expected ra

17、te, the“ hedge ” may result inthe loss of real cash flows.PROBLEMS1. Assume that FASB 8 is still in effect in stead of FASB 52.Con structatranslation exposure report for Centralia Corporation and its affiliates that is thecoun terpartto Exhibit 10.7 in the text. Cen tralia and its affiliates carryin

18、ven tory and fixed assets on the books at historical values.Solution: The following table provides a translation exposure report for CentraliaCorporati on and its affiliates un der FASB 8, which is esse ntially the temporal methodof translation.The differeneebetween the new report and Exhibit 10.7 i

19、s thatnonmonetary accounts such as inventory and fixed assets are translatedat thehistoricalexcha nge rate if they are carried at historical costs. Thus, theseaccounts will not change values when exchange rates change and they do not create tran slati on exposure.Exam in ati on of the tablein dicate

20、s that un der FASB 8 there is n egative netexposure for the Mexica n peso and the euro, whereas un der FASB 52 the net exposure for these currencies is positive. There is no change in net exposure for theCan adia n dollar and the Swiss franc. Con seque ntly, if the euro depreciates aga instthe dolla

21、r from ? 1.1000/$1.00to ? 1.1786/$1.00,as the text example assumed,exposed assets will now fall in value by a smaller amount tha n exposed liabilities,in stead of vice versa. The associated report ing curre ncy imbala nee will be $239,415,calculated as follows:Report ing Curre ncy Imbala nce=-?3,949

22、,0000?1.1786/$1.00-?3,949,0000?1.1000/$1.00=$239,415.Translation Exposure Report under FASB 8 for Centralia and Spa nish Affiliates, December 31,2005 (in 000 Currency Units)Corporati onand its MexicanCan adia nDollarMexica nPesoEuroSwissFra ncAssetsCashCD200Ps 6,000? 825SF 0Acco unts receivable09,00

23、01,0450Inven tory0000Net fixed assets0000Exposed assetsCD200Ps15,000?1,870SF 0LiabilitiesAcco unts payableCD 0Ps 7,000?1,364SF 0Notes payable017,0009351,400Lon g-term debt027,0003,5200ExposedCD 0Ps51,000? 5,819SF1,400liabilitiesNet exposureCD200(Ps36,000)(? 3,949)(SF1,400)2.Assume thatFASB 8 is stil

24、lin effect in stead of FASB 52.Con structacon solidatedbalanee sheet for CentraliaCorporationand its affiliatesafter adepreciati onof the euro from ? 1.1000/$1.00to ? 1.1786/$1.00that is thecoun terpartto Exhibit 10.8 in the text.Cen traliaand its affiliatescarryinven tory and fixed assets on the bo

25、oks at historical values.Solution: This problem is the sequel to Problem 1. The solution to Problem 1 showedthat if the euro depreciated there would be a reportingcurrency imbalanee of$239,415. Un der FASB 8 this is carried through the in come stateme nt as a foreig ntableexchange gain to the retain

26、ed earnings on the balance sheet. The following shows that consolidated retained earnings increased to $4,190,000 from $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 error.Con solidated Bala nee Sheet u

27、n der FASB 8 for Cen tralia Corporati on and its Mexica n andSpa nish Affiliates, December 31,2005: Post-Excha nge Rate Cha nge (in 000 Dollars)Cen tralia Corp.Mexica nSpanishCon solidated(pare nt)AffiliateAffiliateBala neeSheetAssetsCash$ 950 a$ 600$ 700$ 2,250Acco unts receivable1,450 b9008873,237

28、Inven tory3,0001,5001,5006,000In vestme ntinMexica naffiliatec-In vestme ntinSpanishaffiliated-Net fixed assets9,0004,6004,00017,600Total assets$29,087Liabilities and Net WorthAcco unts payable$1,800$ 700 b$1,157$ 3,657Notes payable2,2001,7001,043 e4,943Lon g-term debt7,1102,7002,98712,797Common sto

29、ck3,500cd3,500Reta ined ear nings4,190cd4,190Total liabilities and$29,087net worthaThis in cludes CD200,000 the pare nt firm has in a Ca nadia n bank, carried as $150,000.CD200,000/(CD1.3333/$1.00) = $150,000.b$1,750,000 - $300,000 (= Ps3,000,000/(Ps10.00/$1.00) intracompany loan = $1,450,000.c,d In

30、vestmentin affiliates cancels with the net worth of the affiliates in theconsolidation.eThe Spanish affiliate owes a Swiss bank SF375,000 ( SF1.2727/ ? 1.00 =? 294,649).This is carried on the books,after the exchange rate change, as part of? 1,229,649 =? 294,649 + ? 935,000.?1,229,649/( ? 1.1786/$1.

31、00) = $1,043,313.3. In Example 10.2, a forward contract was used to establish a derivatives“ hedge”to protect Centralia from a translation loss if the euro depreciated from ? 1.1000/$1.00 to ? 1.1786/$1.00. Assume that an over-the-counter put option on the euro with a strike price of? 1.1393/$1.00 (

32、or $0.8777/? 1.00) can be purchased for$0.0088 per euro. Show how the potential translation loss can be“ hedged” with anoption contract.Solution:As in example 10.2, if the potential translationloss is $110,704, theequivalent amount in functional currency that needs to be hedged is3,782,468. Ifin fac

33、t the euro does depreciate to1.1786/$1.00 ($0.8485/1.00), ? 3,782,468 canbe purchased in the spot market for $3,209,289.At a striking price of1.1393/$1.00, the3,782,468 can be sold through the put for $3,319,993, yielding agross profit of $110,704. The put option cost $33,286 (= ? 3,782,468 x $0.008

34、8).Thus, at an exchange rate of? 1.1786/$1.00, the put option will effectively hedge$110,704 - $33,286 = $77,418 of the potential translation loss. At terminal exchangerates of ? 1.1393/$1.00 to ? 1.1786/$1.00, the put option hedge will be lesseffective.An option contract does not have to be exercis

35、ed if doing so isdisadvantageousto the option owner.Therefore, the put will not be exercised atexchange rates of less than1.1393/$1.00 (more than $0.8777/1.00), in which casethe “ hedge” will lose the $33,286 cost of the option.MINI CASE: SUNDANCE SPORTING GOODS, INC.Sundance Sporting Goods, Inc., i

36、s a U.S. manufacturer of high-quality sporting goods- -principally golf, tennis and other racquet equipment, and also lawn sports, such as croquet and badminton- with administrative offices and manufacturing facilities in Chicago, Illinois. Sundance has two wholly owned manufacturing affiliates, one

37、 in Mexico and the other in Canada. The Mexican affiliate is located in Mexico City and services all of Latin America. The Canadian affiliate is in Toronto and serves onlyCanada.Each affiliatekeeps its books in its local currency,which is alsothefunctional currency for the affiliate. The current exc

38、hange rates are: $1.00 =CD1.25 =Ps3.30 = A1.00= 105= W800. The nonconsolidatedbalanee sheetsforSundance and its two affiliates appear in the accompanying table.Noncon solidated Bala nee Sheet for Sundance Sport ing Goods, Inc. and Its Mexica n and Can adia n Affiliates, December 31,2005 (in 000 Curr

39、e ncy Un its)Sundance, Inc.Mexica nCan adia n(pare nt)AffiliateAffiliateAssetsCash$ 1,500Ps 1,420CD 1,200Acco unts receivable2,500 a2,800 e1,500 fInven tory5,0006,2002,500In vestme ntinMexica naffiliate2,400 b-In vestme ntinCan adia naffiliate3,600 c-Net fixed assets12,00011,2005,600Total assets$27,

40、000Ps21,620CD10,800Liabilities and Net WorthAcco unts payable$ 3,000Ps 2,500 aCD 1,700Notes payable4,000d4,2002,300Lon g-term debt9,0007,0002,300Common stock5,0004,500 b2,900cReta ined ear nings6,0003,420 b1,600 cTotalliabilitiesandnet worth$27,000Ps21,620CD10,800aThe pare nt firm is owed Ps1,320,00

41、0 by the Mexica n affiliate. This sum is in cludedin the pare nt s accou nts receivable as $400,000,tran slatedat Ps3.30/$1.00.Theremain der of the pare nt s (Mexica n affiliate s) acco unts receivable (payable) is denomin ated in dollars (pesos).实用标准文档bThe Mexican parent firm It is carried on the s

42、um of the common stocks books,cThe Canadian parent firm (CD2,900,000)firm. It is carried on thethe sum of the common stockon the Canadian affiliate s 126,000,000 due a Japa nese bank. s books as $1,200,000, translatedatmerchandise to an Argentine s books as Ps396,000, are denominated in Mexicanaffil

43、iate is wholly owned by the parent firm.s books at $2,400,000. This represents the(Ps4,500,000) and retained earnings (Ps3,420,000) on the Mexican affiliate translated at Ps3.30/$1.00.affiliate is wholly owned by the parent s books at $3,600,000. This represents and the retained earnings (CD1,600,00

44、0) books, translated at CD1.25/$1.00.dThe parent firm has outstanding notes payable of This sum is carried on the parent firm105/$1.00. Other notes payable are denominated in U.S. dollars.eThe Mexican affiliate has sold on account A120,000 of import house. This sum is carried on the Mexican affiliat

45、e translated at A1.00/Ps3.30. Other accounts receivable pesos.fThe Canadian affiliate has sold on account W192,000,000 of merchandise to a Koreanimporter. This sum is carried on the Canadian affiliate s books as CD300,000, translated at W800/CD1.25. Other accounts receivable are denominated in Canad

46、ian dollars.You joined the International Treasury division of Sundance six months ago after spending the last two years receiving your MBA degree. The corporate treasurer has asked you to prepare a report analyzing all aspects of the translation exposure faced by Sundance asa MNC. She has alsoasked

47、youtoaddress in your analysistherelationship between the firms translation exposure and its transaction exposure.After performinga forecast of futurespot ratesofexchange, you decide thatyoumust do the following before any sensible report can be written.a. Using the current exchange rates and the non

48、consolidated balance sheets for Sundance and its affiliates, prepare a consolidated balance sheet for the MNC according to FASB 52.b. i. Prepare a translation exposure report for Sundance Sporting Goods, Inc., and its two affiliates.ii. Using the translation exposure report you have prepared, determ

49、ine if any reporting currency imbalance will result from a change in exchange rates to which the 文案大全实用标准文档firm has currency exposure. Your forecast is that exchange rates will change from$1.00 = CD1.25 = Ps3.30 = A1.00 = 105 = W800 to $1.00 = CD1.30 = Ps3.30 = A1.03 = 105 = W800.c. Prepare a second

50、 consolidated balance sheet for the MNC using the exchange rates you expect in the future. Determine how any reporting currency imbalance will affect the new consolidated balance sheet for the MNC.d. i. Prepare a transaction exposure report for Sundance and its affiliates. Determine if any transacti

51、on exposures are also translation exposures.itsii. Investigate what Sundance and its affiliates can do to control transaction and translation exposures. Determine if any of the translation exposure should be hedged.文案大全Suggested Solution to Sundance Sporting Goods, Inc.Note to Instructor: It is not

52、necessary to assign the entire case problem. Parts a. and b.i. can be used as self-contained problems, respectively, on basic balance sheet consolidation and the preparation of a translation exposure report.a. Below is the consolidated balance sheet for the MNC prepared according to the current rate

53、 method prescribed by FASB 52. Note that the balance sheet balances. That is, Total Assets and Total Liabilities and Net Worth equal one another. Thus, the assumption is that the current exchange rates are the same as when the affiliates were established. This assumption is relaxed in part c.Con sol

54、idated Bala nee Sheet for Sundance Sport ing Goods, In c. its Mexica n and Can adia nAffiliates,December 31,2005: Pre-Excha nge Rate Cha nge (in 000 Dollars)Sundance,Mexica nCan adia nCon solidatedInc.AffiliateAffiliateBala nee(pare nt)SheetAssetsCash$ 1,500$ 430$ 960$ 2,890Acco unts receivable2,100

55、a849e1,200 f4,149Inven tory5,0001,8792,0008,879In vestme ntin Mexica naffiliateb-In vestme nt in Can adia n affiliatec-Net fixed assets12,0003,3944,48019,874Total assets$35,792Liabilitiesand NetWorthAcco unts payable$ 3,000$ 358 a$1,360$ 4,718Notes payable4,000d1,2731,8407,113Lon g-term debt9,0002,1211,84012,961Common stock5,000bc5,000Reta ined ear nings6,000bc6,000Totalliabilitiesand net worth$35,792a$2,500,000 - $400,000 (= Ps1,320,000/(Ps3.30/$1.00) intracompany