A U.S. company has subsidiaries whose functional currency is their local currency. Assume the subsidiaries have a positive net asset position. Which investment hedges the U.S. company's currency risk from these subsidiaries?

Question

Quizplus · Accepted Answer

Debt denominated in the subsidiaries' currency (C) hedges the U.S. company's currency risk because if the local currency depreciates, the value of the debt in U.S. dollars decreases, offsetting the reduced value of the net assets when converted back to U.S. dollars. This is a natural hedge against currency risk.

A US Company Has Subsidiaries Whose Functional Currency Is Their Local