Vermont Co. has foreign expenses denominated in euros that exceed foreign revenues. Appreciation of the euro relative to the U.S. dollar will cause this firm's reported earnings (from the consolidated income statement) to ____. If a firm desired to protect against this possibility, it could stabilize its reported earnings by ____ euros forward in the foreign exchange market.

Question

Quizplus · Accepted Answer

If the euro appreciates relative to the U.S. dollar, it will cost more U.S. dollars to pay for the foreign expenses, resulting in lower reported earnings. To protect against this possibility, the firm could purchase euros forward in the foreign exchange market. This would lock in the exchange rate and stabilize the reported earnings, reducing the impact of currency fluctuations. Therefore, the correct choice is A, decrease; purchasing.