Question

________ exposure is the potential for an increase or decrease in the parent company's net worth and reported net income caused by a change in exchange rates since the last transaction.

A) Transaction
B) Operating
C) Currency
D) Translation

Answer 1

D) Currency exposure

Step-by-step explanation:

Currency exposure is the risk of losing money due to currency fluctuations. This is an extremely common possibility because most currencies in the world are floating: they vary according to market forces, sometimes, in unpredictable ways.

For example, suppose a Swiss company issues debt in U.S. dollars, but obtains all of its sales revenue in Swiss Francs.

Six months pass and now the Swiss Franc has depreciated against the U.S. dollar by 50% (the Swiss Franc has lost 50% of its value in relation to the U.S. dollar).

Now, the Swiss company will have to pay more dollars in debt for each Swiss franc obtained from sales, causing great financial stress.