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

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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, the hedge position was adversely affected because Mercury had to sell euros at the predetermined lower forward rate, missing out on the benefits of the euro's appreciation.