Question

f a U.S. firm's sales exposure in Switzerland is much lower than its cost of goods sold exposure (this means the US firm's costs are impacted strongly by currency fluctuations while sales revenues are relatively unaffected), there is a ____ overall impact of the Swiss franc's depreciation against the dollar on ____. Question 28 options: negative; gross profit negative; interest expenses positive; gross profit positive; interest expenses

Answer 1

positive; gross profit

Step-by-step explanation:

Currency depreciation occurs when the value of currency fall in a floating exchange rate system where there is no official currency value.

A currency depreciation implies that extra units of the currency is required to buy one unit of another currency.

Sales and cost of good sold exposures refer to how vulnerable Sales and cost of good sold are to variability in the exchange rate of two currencies.

Therefore, if a U.S. firm's sales exposure in Switzerland is much lower than its cost of goods sold exposure, there is a positive overall impact of the Swiss franc's depreciation against the dollar on gross profit.

The reason is that stable revenue that is generated from sales that is less exposed to the variability in the exchange rate will be more than the higher cost of good sold incurred due to the variability. Therefore, the overall effect on gross profit will be positive.