CFA Practice Question

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CFA Practice Question

Which of the following statements is (are) true with respect to the various perspectives of exposure to exchange rate changes?

I. Translation gains and losses, as reported on the parent's financial statement, will impact the parent's stock price in an efficient market.
II. Translation gains and losses will have no direct impact on the company's cash flows.
III. Operating exposure would be greater for companies that export as opposed to import.
IV. Operating exposure would be greater under the all current method as opposed to the temporal method.
A. II only
B. I and II
C. II and IV
Explanation: I is incorrect because translation gains and losses, as reported on the parent's financial statement, are greatly influenced by the accounting method that is chosen by management. Consequently, these translation gains and losses should have no impact on the firm's cash flows and hence, it should not have an impact the parent's stock price in an efficient market.

III is incorrect because as long as a company is exposed to fluctuations in exchange rates, it will have an operating and an accounting exposure.

IV is incorrect because operating exposure is not influenced by the choice of accounting translation method.

User Contributed Comments 2

User Comment
ThePessimist Operating exposure is the extent to which changes in exchange rates affect operating cash flows, as opposed to stated earnings.
levonb Yet, a company that had monetary assets in a depreciating currency would certainly be penalized in an efficient market. so translation gains and losses will have INDIRECT impact on the company's cash flows.
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