9 Questions
What is the main objective of a balance sheet hedge?
To minimize translation exposure
When could a balance sheet hedge be justified?
Under conditions of hyperinflation
What could be a reason for a firm to engage in a balance sheet hedge?
To avoid breaching debt/equity ratio limits
How can a firm minimize translation exposure if it expects a foreign currency to appreciate?
By decreasing net exposed assets
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
Under what circumstances might a firm decide to increase its net exposed assets?
In anticipation of foreign currency depreciation
Which action by management could help in maintaining debt/equity ratios within specified limits?
Minimizing net exposed assets
What is the primary goal of equalizing assets and liabilities in a balance sheet hedge?
To mitigate exchange rate risks
Why would a firm adopt a balance sheet hedge strategy during times of high inflation?
To avoid the impact of hyperinflation on financial statements
Test your knowledge on the translation methods used in financial accounting, such as the temporal method for remeasuring foreign subsidiary financial statements. Understand the differences between operating gains or losses and translation gains or losses.
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