A Canadian subsidiary of a U.S. parent firm is instructed to bill an export to the parent in U.S. dollars. The Canadian subsidiary records the accounts receivable in Canadian dollars and notes a profit on the sale of goods. Later, when the U.S. parent pays the subsidiary the contracted U.S. dollar amount, the Canadian dollar has appreciated 10% against the U.S. dollar. In this example, the Canadian subsidiary will record a

A. The foreign subsidiary is about to be liquidated, so that the value of its Cumulative Translation Adjustment (CTA) would be realized.

B. The firm has debt covenants or bank agreements that state the firm's debt/equity ratio will be maintained within specific limits.

C. The foreign subsidiary is operating is a hyperinflationary environment.

D. All of the above are appropriate reasons to use a balance sheet hedge.

A. the net exposed position is called monetary balance.

B. the change is value of liabilities and assets due to a change in exchange rates will be of equal but opposite direction.

C. both B and C are true.

D. none of the above.

B. may move funds from cash into plant and equipment.

C. may try to decrease net exposed assets in that country.

D. may try to increase net exposed assets in that country.

A. transaction

B. operating

C. translation

D. money market

A. True

B. False

A. gain of $50,000

B. loss of $50,000

C. gain of $450,000

D. loss of euro 450,000