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    International Finance Example Questions

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    1. What is the basic translation hedging strategy? How does it work?
    2. MNCs can always reduce the foreign exchange risk faced by their foreign affiliates by borrowing in the local currency. True or false? Why?
    3. Explain why FASB 133 is "one of the most complex FASB standards".

    Please explain in detail.

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    Solution Preview

    The basic translation hedging strategies:

    The basic translation hedging strategy involves the act of hard currency asset increment and soft currency assets decrement. The act is carried out simultaneously through decreasing with the decreasing of the hard currency liabilities and soft currency liabilities increment. The hedging techniques which are employed for translation exposure include the act of establishment of a currency position which is offsetting. This can be carried out through forward contract whereby any assets lost or gained on exposure of an original currency is what will be offset by a corresponding gain or loss in a currency hedge foreign exchange act (Dubi, 2011).

    Multinationals and foreign exchange risk:

    It is false to say that multinational corporations have the capability of reducing the foreign exchange risks that their foreign affiliates face through local currency borrowing. ...

    Solution Summary

    This solution discusses the basic translation hedging strategy, whether MNCs can reduce the foreign exchange risk, and explains why FASB 133 is one of the most complex FASB standards.