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Test Sp 2018 Saved to this PC Review View Help Tell me what you want to do :E. .E_ITNormal! 1 No Spac.. Heading 1 Heading 2 Title Subtitle Sub Paragraph Styles 10) Economic exposure, one of the three types of foreign exchange exposure: a. arises when foreign currency financial statements of foreign affiliates must be restated into the parent's currency relates to the sensitivity of the firm's contractual cash flows denominated in foreign currency to exchange rate changes as measured in the firm's domestic currency relates to the extent to which the value of the firm would be affected by unexpected changes in currency exchange rates none of the above b. c. d. 11) Transaction exposure, one of the three types of foreign exchange exposure: a. arises when foreign currency financial statements of foreign affiliates must be restated b. relates to the sensitivity of the firm's contractual cash flows denominated in foreign c. relates to the extent to which the value of the firm would be affected by unexpected d. all of the above into the parent's currency currency to exchange rate changes as measured in the firm's domestic currency changes in currency exchange rates

Explanation / Answer

1. Economic exposure relates to the extent by which the value of the firm would be affected by unexpected changes in foreign exchange rates. It is also called operating exposure. It is a significant risk and has a long term impact. Companies can combat economic exposure by investing in foreign exchange markets.

Thus, correct option is C.

2. Transaction exposure is the risk which relates to the sensitivity of the firm's contractual cash flows denominated in foreign currency to exchange rate changes as measured in the firm's domestic currency. It is the most common type of risk for firms involved in international trade. If no hedging is done, and there is a high level of exposure , it could lead to major losses. It is also known as accounting exposure.

Thus,correct option is b.

3. When the U.S. dollar is deemed to be the functional currency of a foreign subsidiary, its financial statements are converted to U.S. dollar using the current rate method.In the current rate method, the assets and liabilites of a comapny are translated using the current rates, as opposed to the temporal method where the same is done at historical rates. With the use of the current method, the risk is very high.

Thus, correct option is B.

4. When the financial currency is neither the U.S. dollar nor the local currency of the country where the subsidiary is located, but the currency of a third country, the subsidiary's financial statements are converted from the local currency to the functional currency using the temporal(historical cost)method and then transalated from the functional currency to the U.S. dollar using the current rate method.

Thus,correct option is C.

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