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A London based firm has a subsidiary located in New York.The subsidiary has $1,000 in assets, $750 in liabilities and $250 in equity.The current spot rate is $1.60/£.
-If the spot rate changes to $1.50/£, what will be the firm's gain or loss?

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A London based firm has a subsidiary located in New York.The subsidiary has $1,000 in assets, $750 in liabilities and $250 in equity.The current spot rate is $1.60/£.
-If the spot rate changes to $1.50/£, what will be the firm's gain or loss?

Quizplus · Accepted Answer

The equity in the subsidiary is $250. At the initial exchange rate of $1.60/£, this is equivalent to £156.25 (£250/$1.60). When the exchange rate changes to $1.50/£, the equity becomes £166.67 (£250/$1.50). The firm gains £10.42 (£166.67 - £156.25) due to the change in the exchange rate.

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