Page 192 - DMGT549_INTERNATIONAL_FINANCIAL_MANAGEMENT

Unit 11: Management of Translation Exposure

Notes
Liabilities & Net Worth
Current liabilities $ 5,460 $ 5,460
Five-year term loan $ 5,460 $ 5,460
Capital stock $ 3,000 $ 3,000
Retained earnings $ 6,000 $ 6,000
CTA (810) 270
Total $ 19,110 $ 20,190
Therefore, loss, by current method = $810.0

And gain, by monetary/N. M. method = $270.0

Caselet HLL Ltd. Translation Exposure

industan Level Ltd has foreign subsidiaries that facilitate its international business.
Its consolidated earnings are partially attributed to the earnings generated by its
Hforeign subsidiaries. The consolidated statements of HLL Ltd are subject to
translation exposure, as all foreign earnings (in different currencies) are translated into US
dollar earnings. Hence the consolidated earnings of the company are affected by the
exchange rates prevailing when the conversion takes place. In the second and third quarter
of 1988, translated earnings of countries, such as Thailand, Malaysia and Indonesia were
reduced substantially, simply because of the depreciation of Asian currencies against the
dollar.

Source: International Financial Management, Madhu Vij, Excel Books.

Task Collect the annual reports of a few MNCs of your choice. Calculate the translation
exposure by the ‘monetary/non-monetary method’ and ‘All current method’ and comment
on the difference in your result. Does it appear that the MNC hedges its translation exposure?
What are the methods it uses to hedge its exposure?

Self Assessment

Fill in the blanks:
12. Under Monetary/Non-monetary Method all monetary balance sheet accounts (cash,
marketable securities, accounts receivable, etc.) of a foreign …………………… are translated
at the current exchange rate.
13. Under Current-Non Current Method …………………… is related to non current assets
and translated at the historical exchange rate.

14. Under …………………… Method of FAS No 8 depreciation and cost of goods sold are
related to real assets (Non monetary) and are translated at historical ER.
15. Under the Current Rate Method of FAS no 52 income statement items are translated at a
…………………… exchange rate.

LOVELY PROFESSIONAL UNIVERSITY 187