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 shee t in thousands of Indian Rupees (INR) as of March 31 is as follows: Balance Sheet (thousands) Indian Rupee Statement INR 26,000 38,000 46,000 65,000 INR 175,000 Assets Cash Accounts receivable Inventory Net plant & equipment Total Liabilities & Net Worth Accounts payable Bank loans Common stock Retained earnings Total INR 11,000 70,000 20,000 74,000 INR 175,000 Exchange rates for translating Nataja Mumbai's balance into euros (€) are: INR79.19 € April 1* exchange rate after 25% devaluation. INR59.39/ € March 31* 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.
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 shee t in thousands of Indian Rupees (INR) as of March 31 is as follows: Balance Sheet (thousands) Indian Rupee Statement INR 26,000 38,000 46,000 65,000 INR 175,000 Assets Cash Accounts receivable Inventory Net plant & equipment Total Liabilities & Net Worth Accounts payable Bank loans Common stock Retained earnings Total INR 11,000 70,000 20,000 74,000 INR 175,000 Exchange rates for translating Nataja Mumbai's balance into euros (€) are: INR79.19 € April 1* exchange rate after 25% devaluation. INR59.39/ € March 31* 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.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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Transcribed Image Text: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 shee t in thousands of Indian Rupees (INR) as of March 31 is as follows:
Balance Sheet (thousands)
Indian Rupee
Assets
Cash
Statement
INR 26,000
38,000
46,000
65,000
INR 175,000
Accounts receivable
Inventory
Net plant & equipment
Total
Liabilities & Net Worth
Accounts payable
INR 11,000
70,000
20,000
74,000
INR 175,000
Bank loans
Common stock
Retained earnings
Total
Exchange rates for translating Nataja Mumbai's balance into euros (€) are:
INR79.19€ April 1s exchange rate after 25% devaluation.
INR59.39 € March 31 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.
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