If a European subsidiary of a U.S. firm has net exposed liabilities of euro 500,000, and the euro drops in value from $1.40/euro to $1.30/euro then the U.S. firm has a translation
A) gain of $50,000.
B) loss of $50,000.
C) gain of $450,000.
D) loss of euro 450,000.

Question

Quizplus · Accepted Answer

The U.S. firm gains because the euro liabilities are now cheaper to settle in dollars. The change in exchange rate from $1.40 to $1.30 means the liabilities decrease by $0.10 per euro, resulting in a gain of $50,000 (500,000 euros * $0.10).

If a European Subsidiary of a U