Consider a U.S.-based MNC with a wholly-owned German subsidiary. Following a depreciation of the dollar against the euro, which of the following describes the conversion effect of the depreciation?

Question

Quizplus · Accepted Answer

A depreciation of the dollar against the euro means that it takes more dollars to buy one euro. Therefore, when the German subsidiary's operating cash flows are translated into dollars for reporting purposes, they will be worth more in dollars. This means that a given operating cash flow in euro will be translated into a higher U.S. dollar cash flow. Choice A is not correct as the competitive position in the marketplace may be affected due to exchange rate changes, but it does not describe the conversion effect of the depreciation.