Depreciation of the euro relative to the U.S. dollar will cause a U.S.-based multinational firm's reported earnings (from the consolidated income statement) to ____. If a firm desired to protect against this possibility, it could stabilize its reported earnings by ____ euros forward in the foreign exchange market.

Question

Quizplus · Accepted Answer

Depreciation of the euro means that when earnings in euros are converted to U.S. dollars, they will be worth less, reducing reported earnings. To hedge against this, the firm can sell euros forward to lock in the current exchange rate.

Depreciation of the Euro Relative to the U