If the British subsidiary of a European firm has net exposed assets of £250,000, and the pound drops in value from €1.35/£ to €1.30/£, the European firm has a translation:
A) gain of €12,500.
B) loss of €12,500.
C) loss of £12,500.
D) gain of £12,500.

Question

Quizplus · Accepted Answer

When the pound drops in value from €1.35/£ to €1.30/£, it means that the euro has gained strength relative to the pound. Therefore, any net exposed assets held in pounds by the European firm are worth less in euros.

To calculate the translation gain or loss, we need to first convert the net exposed assets from pounds to euros.

£250,000 x €1.30/£ = €325,000

Now, we need to compare the value of these net assets before and after the exchange rate change:

Before: €250,000 / €1.35/£ = £185,185.19

After: €325,000 / €1.30/£ = £250,000

The difference between these two values is a loss of £64,814.81.

To express this loss in euros, we divide by the new exchange rate:

£64,814.81 / €1.30/£ = €79,167

Therefore, the European firm has a translation loss of €79,167, which is equivalent to Option B.

If the British Subsidiary of a European Firm Has Net