If a Firm's Subsidiary Is Using the Local Currency as the Functional

question 30

Multiple Choice

If a firm's subsidiary is using the local currency as the functional currency, which of the following is NOT a circumstance that could justify the use of a balance sheet hedge?

• 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.

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Definitions:

Environmental Uncertainty

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Complexity

The state of being intricate or complicated.

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Innovation

The act of converting a concept or innovation into a product or service that adds value or is something consumers are willing to purchase.