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PS3 S – Solutions to lecture 3 related questions
International Financial Strategy (Queen Mary University of London)
Studocu is not sponsored or endorsed by any college or university
PS3 S – Solutions to lecture 3 related questions
International Financial Strategy (Queen Mary University of London)
Downloaded by Namik Abramov (abramovnamik@gmail.com)
lOMoARcPSD|15008662
PROBLEM SET 3
1. Nataja Mumbai Ltd., the Indian subsidiary of a Belgian corporation, is a cardiothoracic
instruments manufacturer. Nataja manufactures the instruments primarily for the medical
industry globally—though with recent advances in cardiovascular surgery, its business has
begun to grow rapidly. Sales are primarily to hospitals based on Europe and Asia. Nataja
Mumbai’s balance sheet in thousands of Indian Rupees (INR) as of March 31 is as follows:
Balance Sheet (thousands)
Indian Rupee
Assets
Statement
Cash
INR 26,000
Accounts receivable
38,000
Inventory
46,000
Net plant & equipment
65,000
Total
INR 175,000
Liabilities & Net Worth
Accounts payable
INR 11,000
Bank loans
70,000
Common stock
20,000
Retained earnings
74,000
Total
INR 175,000
Exchange rates for translating Nataja Mumbai’s balance into euros (€) are:
INR79.19/€ April 1st exchange rate after 25% devaluation.
INR59.39/€ March 31st exchange rate, before 25% devaluation. All inventory was acquired at
this rate.
INR50.00 /€ Historical exchange rate at which plant and equipment were acquired and the
common stock was issued.
a. Using the data presented, assume that the Indian rupee dropped in value from INR59.39/€
to INR79.19/€ between March 31st and April 1st. Assuming no change in the balance sheet
between these two days, calculate the gain or loss from translation by both the current rate
method and the temporal method. Explain the translation gain or loss in terms of change in
the value of the exposed accounts.
b. Can you show how a company can minimise translation exposure under the current rate
method using a balance sheet hedge? Explain the strategy.
c. Using the original data provided for Nataja Mumbai, assume that the Indian rupee
appreciated in value from INR59.39/€ to INR54.50/€ between March 31 and April 1.
Assuming no change in balance sheet accounts between those two days, calculate the gain or
loss from translation by both the current rate method and the temporal method. Explain the
translation gain or loss in terms of changes in the value of the exposed accounts.
Model Answer:
Downloaded by Namik Abramov (abramovnamik@gmail.com)
lOMoARcPSD|15008662
a.
TRANSLATION BY THE CURRENT RATE METHOD
Before Devaluation
After Devaluation
Translated
Translated
Indian Rupee
Exchange Rate
Accounts
Exchange Rate
Accounts
Statement
(INR/€)
Euros
(INR/€)
Euros
INR 26,000
59.39
€ 438
79.19
€ 328
38,000
59.39
640
79.19
480
46,000
59.39
775
79.19
581
65,000
59.39
1,094
79.19
821
INR 175,000
€ 2,947
€ 2,210
INR 11,000
59.39
€ 185
79.19
€ 139
lOMoARcPSD|15008662
Bank loans
70,000
59.39
1,179
79.19
884
Common stock
20,000
400
50.00
400
Retained earnings
74,000
1,183
1,183
CTA account (loss)
–
Total
INR 175,000
€ 2,947
€ 2,210