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Translation Methods in Financial Accounting

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Translation Methods in Financial Accounting

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Questions and Answers

What is the main objective of a balance sheet hedge?

To minimize translation exposure (correct)
To decrease net exposed assets
To maximize translation exposure
To increase net exposed assets

When could a balance sheet hedge be justified?

When expecting foreign currency appreciation
Under conditions of hyperinflation (correct)
When seeking to maximize translation exposure
During times of low inflation

What could be a reason for a firm to engage in a balance sheet hedge?

To increase translation exposure
To avoid breaching debt/equity ratio limits (correct)
To benefit from a net loss
To take advantage of foreign currency depreciation

How can a firm minimize translation exposure if it expects a foreign currency to appreciate?

By decreasing net exposed assets (C) Signup and view all the answers

When would decreasing net exposed assets be beneficial for a firm with respect to foreign exchange gains?

When expecting a depreciation of the foreign currency (D) Signup and view all the answers

Under what circumstances might a firm decide to increase its net exposed assets?

In anticipation of foreign currency depreciation (A) Signup and view all the answers

Which action by management could help in maintaining debt/equity ratios within specified limits?

Minimizing net exposed assets (D) Signup and view all the answers

What is the primary goal of equalizing assets and liabilities in a balance sheet hedge?

To mitigate exchange rate risks (D) Signup and view all the answers

Why would a firm adopt a balance sheet hedge strategy during times of high inflation?

To avoid the impact of hyperinflation on financial statements (B) Signup and view all the answers