Vermont Co. has foreign expenses denominated in euros that exceed foreign revenues. Appreciation of the euro relative to the U.S. dollar will cause this firm's reported earnings (from the consolidated income statement) to ____. If the firm desires to protect against this possibility, it could stabilize its reported earnings by ____ euros forward in the foreign exchange market.

Question

​Vermont Co. has foreign expenses denominated in euros that exceed foreign revenues. Appreciation of the euro relative to the U.S. dollar will cause this firm's reported earnings (from the consolidated income statement) to ____. If the firm desires to protect against this possibility, it could stabilize its reported earnings by ____ euros forward in the foreign exchange market.

Quizplus · Accepted Answer

When the euro appreciates relative to the U.S. dollar, expenses denominated in euros will increase when converted back to dollars, leading to decreased reported earnings. Purchasing euros forward allows the firm to lock in a specific exchange rate, protecting against further appreciation of the euro.

​Vermont Co

Vermont Co