Question

Juno, a US Company, has a 100% owned subsidiary in Japan. The functional currency for the subsidiary is the Japanese yen. The Japanese subsidiary purchases merchandise on credit from a Swiss company, with payment due in US dollars. Between the date of purchase and the due date of the payable, the swiss franc strengthens against the US dollar and the Japanese yen weakens against the US dollar. What will be the result to Juno. There will be a foreign exchange loss There will be both a foreign exchange gain and loss There will be a foreign exchange gain There will be no foreign exchange gain or loss Juno will need to enter into a hedge to reduce its foreign currency exposure

Answer 1

Juno is likely to experience both a foreign exchange gain and loss due to the changes in currency exchange rates between the yen, dollar, and Swiss franc, with the ultimate impact depending on exchange rates at the time of payment or reporting.

Step-by-step explanation:

When the subsidiary of Juno in Japan purchases merchandise on credit from a Swiss company in U.S. dollars and thereafter the Swiss franc strengthens against the U.S. dollar and the Japanese yen weakens against the U.S. dollar, Juno would theoretically face both a foreign exchange gain and a foreign exchange loss. The gain would occur because the subsidiary's liabilities in U.S. dollars now translate into fewer yen if the yen has weakened relative to the dollar. However, the company faces a loss since it needs to use more dollars to settle the debt than initially expected due to the strengthening of the Swiss franc against the dollar. In practice, however, as the payable is not yet settled, the actual impact will be recognized in financial reporting depending on the exchange rates at the time of settlement or reporting date. Juno may choose to hedge in order to manage this currency risk.

Answer 2

There will be a foreign exchange gain

Step-by-step explanation:

In the given situation we can see that there should be an exposure with respect to the foreign exchange for the japanese subsidiary as it should be payable to the foreign currency i.e. in the united states dollars at the same time the functional currency is Yen

So as per the given situation, there would be the foreign exchange gain