In emerging market countries, many firms have debt denominated in foreign currency like the dollar or yen. A depreciation of the domestic currency ________.
A)results in an increase in the value of the firm's assets
B)results in increases in the firm's indebtedness in domestic currency terms, even though the value of their assets remains unchanged
C)means that the firm does not owe as much on their foreign debt
D)strengthens their balance sheet in terms of the domestic currency

Question

Quizplus · Accepted Answer

If the domestic currency depreciates, it means that it takes more of the domestic currency to buy the same amount of foreign currency. This leads to an increase in the value of the firm's foreign debt in domestic currency terms, even if the value of their assets (which may be denominated in the local currency) remains unchanged. This can put strain on the firm's balance sheet and potentially lead to financial difficulties.

In Emerging Market Countries, Many Firms Have Debt Denominated in Foreign