A U.S. parent firm, as result of its business activities in Germany, has a net exposure of €1,000,000. The consolidated reports were prepared at the year-end for the last two successive years. If the exchange rates on these reporting dates changed from $1.00 = €1.10 to $1.00 = €1.00, then the translation exposure report will indicate a "reporting currency imbalance" of
A)$90,910.
B)$0.
C)-$90,910.
D)none of the above

Question

Quizplus · Accepted Answer

The exchange rate change from $1.00 = €1.10 to $1.00 = €1.00 means the euro has appreciated against the dollar. The net exposure of €1,000,000 would have been valued at $909,091 initially (€1,000,000 / 1.10) and then at $1,000,000 (€1,000,000 / 1.00). The reporting currency imbalance is the difference, which is $1,000,000 - $909,091 = $90,910.

A US Parent Firm, as Result of Its Business Activities in in Germany