. Springfield Co., based in the U.S., has customers in London, England that uses the British Pound Sterling as its currency.
Name and discuss the technique that the firm can use to determine whether the quarterly percentage change in its total cash flow is related to the quarterly percentage change in the British Pound Sterling’s value. 2. State and describe the first course of action by a firm faced with macro-exposure to exchange rate changes.
And what do I mean by macro-exposure? 3. Assume that an MNC’s cash flows are positively related to the movements in a foreign currency. If the MNC expects the foreign currency to weaken, it could purchase the currency forward to reduce its degree of economic exposure. a. True b. False 4.Can an MNC Reduce the Impact of Translation Exposure by Communicating?
POINT: Yes. Investors commonly use earnings to derive an MNC’s expected future cash flows. Investors do not necessarily recognize how an MNC’s translation exposure could distort their estimates of the MNC’s future cash flows. Therefore, the MNC could clearly communicate in its annual report and elsewhere how the earnings were affected by translation gains and losses in any period.
If investors have this information, they will not overreact to earnings changes that are primarily attributed to translation exposure. COUNTER-POINT: No. Investors focus on the bottom line and should ignore to any communication regarding the translation exposure.
Moreover, they may believe that translation exposure should be accounted for anyway. If foreign earnings are reduced because of a weak currency, the earnings may continue to be weak if the currency remains weak. WHO IS CORRECT? Use the Internet to learn more about this issue. Which argument do you support? Offer your own opinion on this issue.