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

Appreciation of the euro relative to the U.S. dollar will cause Vermont Co.'s reported earnings to decrease because the euro-denominated expenses will be worth more in U.S. dollars. To protect against this possibility, the firm could stabilize its reported earnings by selling euros forward in the foreign exchange market. This would lock in the current exchange rate and prevent the firm from losing money if the euro appreciates further.