4、Renaud Blanc Case Scenario

Renaud Blanc is an analyst in the risk management department of De Luca Corporation, a U.S. company that processes fruit and vegetables bought on the world market. Production and sales of packaged fruit juices and condiments occur in the United States, South America, and Europe. Blanc is responsible for making assessments of the relative strength of the U.S. dollar against other relevant currencies. Blanc knows that relative rates of inflation will influence the dollar value of a currency, so he forecasts inflation for the United States and its trading partners.

De Luca buys fruit from Brazil. For the coming year Blanc forecasts annual U.S. inflation of 2% and annual Brazilian inflation of 10%. The current exchange rate is BRL3/USD (BRL = Brazilian real, USD = U.S. dollar). The one-year risk-free interest rates in the United States and Brazil are 2.25% and 18%, respectively.

One of Blanc’s colleagues, Paula Smith, makes the following statements:

1.            "The theory of uncovered interest rate parity allows me to calculate E(S₁)/S₀ as being equal to the ratio of "one plus the one-year Brazilian interest rate” to "one plus the one-year U.S. interest rate,” when the expected ending exchange rate, E(S₁), and the beginning of period exchange rate, S₀, are quoted as BRL/USD.” 

2.            "Exchange rate risk reduces to inflation uncertainty if all parity relationships hold perfectly.”

Smith questions Blanc about whether forward markets for the Brazilian real give any indication about the expected exchange rate in one year. Blanc responds:

"If the forward rate equals the expected spot rate, then using forward currency contracts to hedge exchange risk would be costless (aside from commissions) in terms of the expected dollar price that De Luca would pay for fruit in Brazil.”

De Luca also purchases fruit and packaging materials in Europe. Blanc is considering various ways to hedge against the cost of future material purchases in Europe. For the coming year, he forecasts annual inflation of 4% inflation for Europe and 2% for the United States. He believes that uncovered and covered interest parity hold for the United States and Europe.

Question 1

If the international Fisher effect holds, based on Blanc's forecasts, the current one-year risk-free interest rate in Europe should be closest to:

A. 0.25%.

B. 2.25%.

C. 4.25%.

D. 6.25%.

Question 2

Based on Exhibit 1, funded status of Duban's pension plan under U.S. GAAP for 2007 ($ millions) would be closest to:

A. 1,256 liability.

B. 681 liability.

C. 681 asset.

D. 1,256 asset.

Question 3

Based on Exhibit 1, the pension expense ($ millions) that would be reported on Duban's 2007 income statement under U.S. GAAP would be closest to:

A. 187.

B. 225.

C. 230.

D. 317.

Question 4

Based on Exhibit 1, the underlying economic pension expense ($ millions) for Duban for 2007 would be closest to:

A. 187.

B. 192.

C. 233.

D. 274.

Question 5

Based on Exhibit 2, under U.S. GAAP Duban's 2007 translation gain on Kerwin's identifiable assets resulting from exchange rate changes ($ millions) was closest to:

A. 133.

B. 165.

C. 197.

D. 216.

Question 6

Based on Exhibit 2, the effect of exchange rate changes (exchange rate flow effect) on Kerwin's 2007 net sales ($ millions) was closest to:

A. 361

B. 383.

C. 405.

D. 429.

Question 7

Based on Exhibit 2, the operational effect on Kerwin's 2007 operating income should be computed by multiplying the change in operating income (in SEK) by the:

A. 2007 average rate.

B. 2006 average rate.

C. change in the ending exchange rates.

D. change in the average exchange rates.

Question 1

If the international Fisher effect holds, based on Blanc's forecasts, the current one-year risk-free interest rate in Europe should be closest to:

A. 0.25%.

B. 2.25%.

C. 4.25%.

D. 6.25%.

 
Correct answer = C

"Foreign Exchange Parity Relations," Bruno Solnik and Dennis McLeavey
2008 Modular Level II, Vol. 1, pp. 564-566
Study Session 4-19-h
discuss the international Fisher relation and calculate and interpret 1) interest rates exactly and by linear approximation, given expected inflation rates and the assumption that the international Fisher relation holds, 2) the real interest rate, given interest rates and inflation rates and the assumption that the international Fisher relation holds, and 3) the international Fisher relation, and its linear approximation, between interest rates and expected inflation rates
If the international Fisher relation holds, then the real rate in Europe is equal to the real rate in the United States. Given r_US = 2.25 and I_US = 2, we calculate the real U.S. rate, ρ , to be equal to 2.25 - 2.00 = 0.25 (where I_US is the expected rate of inflation in the U.S.). We now know that the European real rate is ρ = 0.25%. Based on I_Europe = 4%, we have r_Europe = ρ + expected I_Europe = 0.25 + 4.0 = 4.25%. 

Question 2

Based on Exhibit 1, funded status of Duban's pension plan under U.S. GAAP for 2007 ($ millions) would be closest to:

A. 1,256 liability.

B. 681 liability.

C. 681 asset.

D. 1,256 asset.

 
Correct answer = A

"Understanding Retirement Benefit Accounting and Disclosures for Financial Analysis," Thomas R. Robinson, Paul Munter, and Julia Grant
2008 Modular Level II, Vol. 2, pp. 122-124
Study Session 6-24-e
calculate the underlying economic liability (or asset) of a company based upon pension and other post-employment benefit disclosures
The pension liability is calculated as follows:

Question 3

Based on Exhibit 1, the pension expense ($ millions) that would be reported on Duban's 2007 income statement under U.S. GAAP would be closest to:

A. 187.

B. 225.

C. 230.

D. 317.

 
Correct answer = B

"Understanding Retirement Benefit Accounting and Disclosures for Financial Analysis," Thomas R. Robinson, Paul Munter, and Julia Grant
2008 Modular Level II, Vol. 2, pp. 130-132
Study Session 6-24-b
describe the components of a company's defined-benefit pension expense and explain the impact of plan assumptions on that pension expense
The pension expense is calculated as follows:

Question 4

Based on Exhibit 1, the underlying economic pension expense ($ millions) for Duban for 2007 would be closest to:

A. 187.

B. 192.

C. 233.

D. 274.

 
Correct answer = D

"Understanding Retirement Benefit Accounting and Disclosures for Financial Analysis," Thomas R. Robinson, Paul Munter, and Julia Grant
2008 Modular Level II, Vol. 2, pp. 124, 130
Study Session 6-24-f
calculate the underlying economic pension and other post-employment expense (income) based upon disclosures after removing the effect of amortized items and smoothing mechanisms
The economic pension expense is calculated as follows:

Question 5

Based on Exhibit 2, under U.S. GAAP Duban's 2007 translation gain on Kerwin's identifiable assets resulting from exchange rate changes ($ millions) was closest to:

A. 133.

B. 165.

C. 197.

D. 216.

 
Correct answer = C

"Analysis of Multinational Operations," Gerald I. White, Ashwinpaul C. Sondhi, and Dov Fried
2008 Modular Level II, Vol. 2, pp. 186-189
Study Session 6-26-d, f
analyze and evaluate the effects of the all-current and temporal methods on the parent company's balance sheet and income statement;
calculate the translation effects of the all-current and temporal methods of foreign currency translation
To ascertain how much of the change in identifiable assets resulted from exchange rate changes rather than an actual asset increase in krona, the year-end rate is used to translate assets into krona.

The translation gain on identifiable assets is computed as:

Question 6

Based on Exhibit 2, the effect of exchange rate changes (exchange rate flow effect) on Kerwin's 2007 net sales ($ millions) was closest to:

A. 361

B. 383.

C. 405.

D. 429.

 
Correct answer = D

"Analysis of Multinational Operations," Gerald I. White, Ashwinpaul C. Sondhi, and Dov Fried
2008 Modular Level II, Vol. 2, pp. 188-191
Study Session 6-26-a
distinguish between the impact of changes in local currency sales and changes in exchange rates on the translated sales of the subsidiary and parent company
"The exchange rate effect is estimated by multiplying the income statement component (in local currency) by the change in the average exchange rate" (p. 189). Multiplying Kerwin's net sales in dollars by the average rate produces net sales in millions of krona.
2007 Net Sales (krona) = ($ Net Sales) x (Average Rate) = $5,500 x 6.800 = $37,400
Exchange Rate Effect = Net Sales (krona) x change in average exchange rate
$429 = $37,400 x (1 / 6.800 - 1 / 7.375) 

Question 7

Based on Exhibit 2, the operational effect on Kerwin's 2007 operating income should be computed by multiplying the change in operating income (in SEK) by the:

A. 2007 average rate.

B. 2006 average rate.

C. change in the ending exchange rates.

D. change in the average exchange rates.

 
Correct answer = B

"Analysis of Multinational Operations," Gerald I. White, Ashwinpaul C. Sondhi, and Dov Fried
2008 Modular Level II, Vol. 2, pp. 188-191
Study Session 6-26-d, f
analyze and evaluate the effects of the all-current and temporal methods on the parent company's balance sheet and income statement;
calculate the translation effects of the all-current and temporal methods of foreign currency translation "The operational effect is estimated by multiplying the change in the income statement component (in local currency) by the previous period's average exchange rate" (p. 189). Multiplying Kerwin's operating income in dollars by the average rate produces operating income in millions of krona. For example:
2007 Operating Income (krona) = $ Operating Income x 2007 Average Rate =
$3,850 x 6.800 = $26,180. 

非常感谢。

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