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国际金融 International Finance Test Bank_12
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Chapter 12—Managing Economic Exposure and Translation Exposure
1. 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.
a. be reduced; purchasing
b. be reduced; selling
c. increase; selling
d. increase; purchasing
ANS: B PTS: 1 2. 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.
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This firm would ____ a stronger dollar and would ____ a weaker dollar.
a. benefit from; be unaffected by
b. benefit from; be adversely affected by
c. be unaffected by; be adversely affected by
d. behttp://doc.xuehai.net/bce35dea43cd5fe8b2e511fc6.html unaffected by; benefit
from
e. benefit from; benefit from
ANS: B PTS: 1 3. Whitewater Co. is a U.S. company with sales to Canada amounting 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.
a. increase; increase
b. decrease; increase
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c. decrease; decrease
d. increase; decrease
e. increase; be unaffected
ANS: D PTS: 1 4. Sycamore (a U.S. firm) has no subsidiaries and presently has sales
to Mexican customers amounting to
MXP98
million,
while
its
peso-denominated
expenses
amounthttp://doc.xuehai.net/bce35dea43cd5fe8b2e511fc6.html 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.
a. reduce; high
b. reduce; low
c. increase; low
d. increase; high
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ANS: D PTS: 1 5. Which of the following is an example of economic exposure but not
an example of transaction
exposure?
a. 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.
b.
An
increase
in
the
pound's
thehttp://doc.xuehai.net/bce35dea43cd5fe8b2e511fc6.html
value
U.S.
firm's
increases
cost
of
British pound payables.
c. A decrease in the peso's value decreases a U.S. firm's dollar value of peso
receivables.
d. A decrease in the Swiss franc's value decreases the dollar value of interest
payments on a
Swiss deposit sent to a U.S. firm by a Swiss bank.
ANS: A PTS: 1 6. 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
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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.)
a. The dollar value of sales is higher if the pound depreciates against the dollar.
b. The dollar value of sales is unaffected by the pound's exchange rate.
c. A and B
d. None of the http://doc.xuehai.net/bce35dea43cd5fe8b2e511fc6.htmlabove
ANS: D PTS: 1 7. If a U.S. firm's expenses are more susceptible to exchange rate
movements than revenue, the firm will
____ if the dollar ____.
a. benefit; weakens
b. be unaffected; weakens
c. be unaffected; strengthens
d. benefit; strengthens
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ANS: D PTS: 1 8. 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 ____.
a. decreasing foreign revenues; decreasing foreign expenses
b. decreasing foreign revenues; increasing foreign expenses
c. increasing foreign revenues; decreasing foreign revenues
d. decreasing foreign expenses; increasing foreign revenues
ANS:
D
PTS:
1
9.
Any
restrhttp://doc.xuehai.net/bce35dea43cd5fe8b2e511fc6.htmlucturing of operations
that ____ the difference between a foreign currency's inflows and
outflows may ____ economic exposure.
a. reduces; increase
b. increases; reduce
c. reduces; reduce
d. A and B
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e. none of the above
ANS: C PTS: 1
10. It is generally least difficult to effectively hedge various types of:
a. translation exposure.
b. transaction exposure.
c. economic exposure.
d. A and C
ANS: B
PTS: 1
11. With regard to hedging translation exposure, translation losses ____, and gains
on forward contracts
used to hedge translation exposure ____.
a. are not tax deductible; are taxed
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b. are tax deductible; are taxed
c. are not tax deductible; are not taxed
d. are tax deductible; are not taxed
ANS: A PTS: 1://doc.xuehai.net/bce35dea43cd5fe8b2e511fc6.htmlr
12. If a firm does not have foreign subsidiaries, it is not subject to ____.
a. transaction exposure
b. economic exposure
c. A and B
d. translation exposure
ANS: D PTS: 1
13. If the Singapore dollar appreciates against the U.S. dollar over this year, the
consolidated earnings of a
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U.S. company with a subsidiary in Singapore will be ____ as a result of the exchange
rate movement. a. negative
b. adversely affected
c. favorably affected
d. unaffected
ANS: C PTS: 1
14. Assume a U.S. firm uses a forward contract to hedge all of its translation exposure.
Also assume that
the firm underestimated what its foreign earnings would be. Assume that the foreign
currency
depreciated over the year. The firm would generate a translation ____, which would
be
____
thanhttp://doc.xuehai.net/bce35dea43cd5fe8b2e511fc6.html
generated by the forward contract.
a. loss; smaller
b. loss; larger
the
gain
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c. gain; larger
d. gain; smaller
ANS: B PTS: 1
15. A perfect hedge (full coverage) on translation exposure can usually be achieved
when:
a. using the money market hedge.
b. using the forward hedge.
c. using the futures hedge.
d. none of the above, since a perfect hedge is nearly impossible.
ANS: D PTS: 1
16. Assume that a Japanese car manufacturer exports cars to U.S. dealerships, which
are priced in yen.
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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:
a. closing down most of its plants in the U.S.
b. produchttp://doc.xuehai.net/bce35dea43cd5fe8b2e511fc6.htmling more automobiles
in the U.S.
c. relying completely on Japanese suppliers for its parts.
d. pricing its exports in dollars.
ANS: B
PTS: 1
17. 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?
a. increase Zambian supply orders.
b. increase Zambian sales.
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c. restructure debt to increase debt payments in Zambia.
d. reduce Zambian sales.
ANS: B PTS: 1
18. Which of the following firms is not exposed to translation exposure?
a. Firm X, with a fully owned subsidiary that periodically remits earnings generated
in Great://doc.xuehai.net/bce35dea43cd5fe8b2e511fc6.htmlr
Britain to the U.S.-based parent.
b. Firm Y, with a fully owned subsidiary that periodically generates foreign losses
in
Sweden. The parent covers at least some of these losses.
c. Firm Z, with a fully owned subsidiary that generates substantial earnings in
Germany. The
subsidiary never remits earnings but reinvests them in Germany.
d. All of the above firms are exposed to translation exposure.
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ANS: D PTS: 1
19. ____ represents any impact of exchange rate fluctuations on a firm's future cash
flows.
a. Translation exposure
b. Economic exposure
c. Transaction exposure
d. None of the above
ANS: B PTS: 1
20. An effective way for an MNC to assess its economic exposure is to review the firm's:
a. income statement.
b. liquidity.
c. retained earnings.http://doc.xuehai.net/bce35dea43cd5fe8b2e511fc6.html
d. level of stockholders' equity.
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ANS: A PTS: 1
21. 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:
a. cash inflows exceed cash outflows in each foreign currency.
b. cash outflows exceed cash inflows in each foreign currency.
c. cash inflows match cash outflows in each foreign currency.
d. none of the above
ANS: C PTS: 1
22. Managing economic exposure is generally perceived to be ____ managing transaction
exposure.
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a. more difficult than
b. less difficult than
c. just as difficult as
d. none of the above
ANS: A
PTS: 1
23.
As
opposed
to
transaction
managinhttp://doc.xuehai.net/bce35dea43cd5fe8b2e511fc6.htmlg
involves developing a(n) ____
solution.
a. short-term
b. long-term
c. immediate
d. none of the above
exposure,
economic
exposure
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ANS: B PTS: 1
24. 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. a. positive; positively
b. positive; negatively
c. negative; positively
d. B and C
e. none of the above
ANS: A PTS: 1
25. Assume that an MNC's cash flows are positively related to the movements in a
foreign currency. If thehttp://doc.xuehai.net/bce35dea43cd5fe8b2e511fc6.html
MNC expects the foreign currency to weaken, it could purchase the currency forward
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to reduce its degree of economic exposure.
a. True
b. False
ANS: F PTS: 1
26. 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.
a. more; fewer
b. more; more
c. less; fewer
d. less; more
ANS: C PTS: 1
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27. 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.
://doc.xuehai.net/bce35dea43cd5fe8b2e511fc6.htmlra. asset; matches
b. asset; exceeds
c. liability; matches
d. liability; is less than
ANS: C PTS: 1
28. Long-term forward contracts are a possible way to hedge the distant sale of fixed
assets in foreign
countries, but they may not be available for many emerging market currencies.
a. True
b. False
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ANS: T PTS: 1
29. ____ exposure occurs when an MNC translates each subsidiary's financial data to
its home currency
for consolidated financial statements.
a. Translation
b. Transaction
c. Economic
d. None of the above
ANS: A PTS: 1
30. ____ is (are) not a limitation of hedging translation exposure.
a. Inaccurate stock price forecasts
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b. Inadequate forward contracts for some currencies
c. Taxation ohttp://doc.xuehai.net/bce35dea43cd5fe8b2e511fc6.htmln gains from
forward contracts
d. Increased transaction exposure
ANS: A PTS: 1
31. 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.
a. purchase the currency forward
b. sell the currency forward
c. purchase futures contracts of the currency
d. A or C
e. none of the above
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ANS: B PTS: 1
32. Translation losses are ____, while gains on forward contracts used to hedge
translation exposure are
____.
a. tax deductible; not taxed
b. not tax deductible; not taxed
c. not tax deductible; taxed
d. tax deductible; taxed
ANS: D PTS: 1
33.
In
general,
it
is
more
difficult
to
effectively
hhttp://doc.xuehai.net/bce35dea43cd5fe8b2e511fc6.htmledge economic or translation
exposure than to hedge
transaction exposure.
a. True
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b. False
ANS: T PTS: 1
34. A foreign subsidiary with more susceptible expenses than revenue to exchange rate
movements will be
favorably affected by an appreciation of the foreign currency.
a. True
b. False
ANS: F PTS: 1
35. U.S. firms can attempt to hedge their translation exposure of their European
subsidiaries with a
forward purchase of euros.
a. True
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36.
37.
38.
39.
40.
41.
42. b. False ANS: F PTS: 1 Hedging translation exposure with forward contracts can
backfire if the currency being hedged depreciates. a. True b. False ANS: F PTS: 1
A limitation of hedging translation exposure is that translation losses are not tax
deductible, whereas ghttp://doc.xuehai.net/bce35dea43cd5fe8b2e511fc6.htmlains on
forward contracts used to hedge translation exposure are taxed. a. True b. False ANS:
T PTS: 1 The translation gain (or loss) is simply a paper gain (or loss). Conversely,
the gain (or loss) resulting from a hedge strategy is a real gain (or loss). a. True
b. False ANS: T PTS: 1 All MNCs are subject to translation exposure. a. True b. False
ANS: F PTS: 1 U.S.-based MNCs invoicing in Asian currencies and incurring expenses
in Asian currencies were probably less affected by the weakness of Asian currencies
than U.S.-based MNCs that invoice in Asian currencies but do not incur expenses in
those currencies. a. True b. False ANS: T PTS: 1 The management of economic exposure
is normally focused completely on transactions that will occur in the next three
months. a. True b. False ANS: F PTS: 1 Transaction exposure results when an MNC
translates each subsidiary's financial data to its home
currency
for
consolidated
financial
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http://doc.xuehai.net/bce35dea43cd5fe8b2e511fc6.htmlstatements.
a. True
b. False
ANS: F PTS: 1
43. Although forward contracts may reduce translation exposure at the expense of
increasing transaction
exposure, they are sometimes used to hedge translation exposure.
a. True
b. False
ANS: T PTS: 1
44. Vermont Co. has foreign expenses denominated in euros that exceed foreign revenues.
Appreciation of
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the euro relative to the U.S. dollar will cause this 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.
a. decrease; purchasing
b. decrease; selling
c. increase; selling
d. increase; purchasing
ANS: A PTS: 1
http://doc.xuehai.net/bce35dea43cd5fe8b2e511fc6.html45. Sarakose Co. is a U.S.
company with sales to Canada amounting to C$5 million. Its cost of materials
attributable to the purchase of Canadian goods is C$7 million. Its interest expense
on Canadian loans is C$5 million. The dollar value of Sarakose's "earnings before
interest and taxes" would ____ if the Canadian dollar appreciates; the dollar value
of its cash flows would ____ if the Canadian dollar
appreciates.
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a. increase; increase
b. decrease; increase
c. decrease; decrease
d. increase; decrease
e. increase; be unaffected
ANS: C PTS: 1
46. If a U.S. firm has much more revenue than expenses denominated in euros, the firm
will likely ____ if
the euro ____.
a. benefit; weakens
b. be unaffected; weakens
c. be unaffected; strengthens
d. benefit; strengthens
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ANS: D PTS:http://doc.xuehai.net/bce35dea43cd5fe8b2e511fc6.html 1
47. Assume that Atlanta Co. is producing motorcycles and selling them to U.S.
customers. Atlanta Co.
obtains all of its supplies from American firms and has no competition in the U.S.
It has one major competitor in Japan. Now assume that Phoenix Co. is producing office
furniture and obtains its
supplies from a Canadian firm. Based on this information, Atlanta Co. has ____
exposure and Phoenix Co. has ____ exposure.
a. transaction; translation
b. translation; transaction
c. economic; transaction
d. economic; translation
ANS: C
PTS: 1
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48. Orlando Co. produces home appliances and sells them in the U.S. It outsources
the production of the
appliances to a Chinese manufacturer, and the imported appliances are priced in
dollars. Its major competitor for appliances is located in Mexico. Based on this
information, Orlandohttp://doc.xuehai.net/bce35dea43cd5fe8b2e511fc6.html Co. is
subject to ____ exposure.
a. economic
b. transaction
c. translation
d. economic and transaction
ANS: A PTS: 1
49. Tennessee Co. conducts business in the U.S. and Canada. The net cash flows from
Canadian
operations are expected to be C$500,000 next year. The Canadian dollar is valued at
about $.90. The net cash flows from U.S. operations are supposed to be $200,000. To
reduce sensitivity of its net cash flows without reducing its volume of business in
Canada, Tennessee Co. could:
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a. purchase Canadian supplies.
b. increase its borrowings in U.S.
c. decrease prices on Canadian goods.
d. decrease its borrowed funds in Canada.
ANS: A PTS: 1
50. Mercury Co. has a subsidiary based in Italy and is exposed to translation exposure.
Mercury forecasts
that its earnings nehttp://doc.xuehai.net/bce35dea43cd5fe8b2e511fc6.htmlxt year
will be €10 million. Mercury decides to hedge the expected earnings by selling €10
million forward. During the next year, the euro appreciated. Mercury's consolidated
earnings were ____ affected by the euro's movement, and Mercury's hedge position was
____ affected by the euro's movement.
a. favorably; favorably
b. favorably; adversely
c. adversely; favorably
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d. adversely; adversely
ANS: B PTS: 1
51. All MNCs are subject to transaction exposure.
a. True
b. False
ANS: F PTS: 1
52. A foreign subsidiary with more revenue than expenses denominated in a foreign
currency will be
favorably affected by appreciation of the foreign currency.
a. True
b. False
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ANS: T PTS: 1
53.
Economic
exposure
represents
any
impact
of
exchange
rathttp://doc.xuehai.net/bce35dea43cd5fe8b2e511fc6.htmle fluctuations on a firm's
future cash flows
and thus includes transaction exposure.
a. True
b. False
ANS: T PTS: 1
54. In general, it is more difficult to effectively hedge economic or translation
exposure than to hedge
transaction exposure.
a. True
b. False
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ANS: T PTS: 1
55. To reduce economic exposure when a foreign currency has a greater impact on cash
inflows, an MNC
could reduce its level of foreign sales, increase its foreign supply orders, or
restructure debt to increase debt payments in the foreign currency.
a. True
b. False
ANS: T PTS: 1
56. When a foreign currency has a greater impact on cash outflows than on cash inflows,
one possibility in
restructuring operations is to reduce foreign sales.
a. True
://doc.xuehai.net/bce35dea43cd5fe8b2e511fc6.htmlb. False
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ANS: F PTS: 1
57. Even if translation exposure does not affect cash flows, it is a concern of many
MNCs.
a. True
b. False
ANS: T PTS: 1
58. Translation exposure results when an MNC translates each subsidiary's financial
data to its home
currency for consolidated financial statements.
a. True
b. False
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ANS: T PTS: 1
59. Implementing a forward or money market hedge to hedge translation exposure may
increase
transaction exposure.
a. True
b. False
ANS: T PTS: 1
60. Which of the following statements is incorrect?
a. Transaction exposure represents only the exchange rate risk when converting net
foreign
cash inflows to U.S. dollars or when purchasing foreign currencies to send
paymentshttp://doc.xuehai.net/bce35dea43cd5fe8b2e511fc6.html.
b. Economic exposure represents any impact of exchange rate fluctuations on a firm's
future
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cash flows.
c. Firms can simply focus on hedging their foreign currency payables and/or
receivables to
hedge economic exposure.
d. The management of economic exposure tends to serve as a long-term solution rather
than
just a short-term solution.
ANS: C
PTS: 1
61. Thornton Corporation has extensive liabilities denominated in Cyprus pounds
resulting from imports
from Cyprus. However, Thornton's revenues are denominated solely in U.S. dollars.
Which of the following is probably not true?
a. Thornton would benefit from a depreciation of the Cyprus pound.
b. Thornton has at least some transaction exposure.
c. Thornton has at least some economic exposure.
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d. Thornton has at least some translation exposure.
://doc.xuehai.net/bce35dea43cd5fe8b2e511fc6.htmle. All of the above are true.
ANS: D PTS: 1
62. A U.S.-based MNC has a subsidiary in Barbados that generates substantial net cash
inflows
denominated in Barbados dollars. Given this information, the MNC would ____ from a(n)
____ of the Barbados dollar.
a. benefit; appreciation
b. benefit; depreciation
c. not benefit; appreciation
d. none of the above
ANS: A PTS: 1
63. Campbell Company has a subsidiary located in Jamaica. The subsidiary has generated
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losses for the
last five years and is expected to generate losses for the next ten years. Campbell
is reluctant to divest of this subsidiary, however. Given this information, Campbell
would ____ from a(n) ____ of the Jamaican dollar.
a. benefit; appreciation
b. benefit; depreciation
c. not benefit; appreciation
d. not behttp://doc.xuehai.net/bce35dea43cd5fe8b2e511fc6.htmlnefit; depreciation
e. B and C
ANS: E PTS: 1
64. ____ is (are) a limitation of hedging translation exposure.
a. Inaccurate earnings forecasts
b. Inadequate forward contracts for some currencies
c. Accounting distortions
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d. Increased transaction exposure
e. All of the above
ANS: E PTS: 1
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