Economics · Foreign Exchange Risk Management
A UK-based company, British Co, has a subsidiary in the Eurozone. The subsidiary's assets exceed its liabilities, with a net exposure of €5 million. The subsidiary's financial performance is reported in British Co's home currency, Pound Sterling (£). The current exchange rate is €1.17 to £1. Due to volatility, the euro is expected to depreciate against the pound. Which of the following statements correctly describes the foreign exchange risk and impact?
Verified Solution4 OptionsUpdated: October 2026👁️1 View
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- 1British Co is exposed to transaction risk, and the expected depreciation of the euro will result in a loss on the consolidation of the subsidiary's financial statements.
- 2British Co is exposed to translation risk, and the expected depreciation of the euro will result in a loss on the consolidation of the subsidiary's financial statements.✓
- 3British Co is exposed to economic risk, and the expected depreciation of the euro will reduce the present value of the subsidiary's future cash flows.
- 4British Co is exposed to transaction risk, and the expected depreciation of the euro will result in a gain on the consolidation of the subsidiary's financial statements.
Correct answer
British Co is exposed to translation risk, and the expected depreciation of the euro will result in a loss on the consolidation of the subsidiary's financial statements.
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