Mercury Co. has a subsidiary based in Italy and is exposed to translation exposure. Mercury forecasts that its earnings next year will be €10 million. Mercury decides to hedge the expected earnings by selling €10 million forward. During the next year, the euro appreciated. Mercury's consolidated earnings were ____ affected by the euro's movement, and Mercury's hedge position was ____ affected by the euro's movement.

Question

​Mercury Co. has a subsidiary based in Italy and is exposed to translation exposure. Mercury forecasts that its earnings next year will be €10 million. Mercury decides to hedge the expected earnings by selling €10 million forward. During the next year, the euro appreciated. Mercury's consolidated earnings were ____ affected by the euro's movement, and Mercury's hedge position was ____ affected by the euro's movement.

Quizplus · Accepted Answer

Mercury's consolidated earnings were favorably affected by the euro's appreciation, increasing the value of its earnings when converted back to its home currency. However, because Mercury sold euros forward, expecting a depreciation, the hedge position was adversely affected when the euro appreciated instead.

​Mercury Co

Mercury Co