If a firm's subsidiary is using the local currency as the functional currency, which of the following is NOT a circumstance that could justify the use of a balance sheet hedge?
A) The foreign subsidiary is about to be liquidated, so that the value of its Cumulative Translation Adjustment (CTA) would be realized.
B) The firm has debt covenants or bank agreements that state the firm's debt/equity ratio will be maintained within specific limits.
C) The foreign subsidiary is operating is a hyperinflationary environment.
D) All of the above are appropriate reasons to use a balance sheet hedge.

Question

Quizplus · Accepted Answer

A balance sheet hedge is not appropriate when the foreign subsidiary is about to be liquidated because the CTA will be realized and there will be no need to hedge the translation exposure.

If a Firm's Subsidiary Is Using the Local Currency as the Functional