The foreign subsidiary of a U.S.firm is profitable when profits are measured in the foreign currency but those profits become losses when measured in U.S.dollars.This is an example of which one of the following?

Question

Quizplus · Accepted Answer

This situation is an example of translation exposure to exchange rate risk. Translation exposure refers to the potential impact of fluctuations in exchange rates on a company's financial statements when consolidated across different countries. The profits earned in the foreign subsidiary were denominated in foreign currency and when translated back into U.S. dollars, they were reduced due to changes in exchange rates.

The Foreign Subsidiary of a U