If the European subsidiary of a U.S. firm has net exposed assets of euro 500,000, and the euro drops in value from $1.40/euro to $1.30/euro the U.S. firm has a translation
A) gain of $50,000.
B) loss of $50,000.
C) gain of $450,000.
D) loss of euro 450,000.

Question

Quizplus · Accepted Answer

The net exposed assets of the European subsidiary are euro 500,000, and the drop in the euro value from $1.40/euro to $1.30/euro represents a 7.14% decrease. Therefore, the subsidiary's assets are now worth $650,000 (500,000 x 1.30). If the U.S. firm were to translate these assets back into dollars at the current exchange rate of $1.30/euro, they would now be worth $845,000 (650,000 / 0.77). That means the U.S. firm has a loss of $50,000 ($845,000 - $895,000).

If the European Subsidiary of a U