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a, why is it important that, in countries with high inflation, financial statements be adjusted for...

a, why is it important that, in countries with high inflation, financial statements be adjusted for inflation?

b, why might a company want to hedge its balance sheet exposure? what is the paradox associated with hedging balance sheet exposure?

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Answer #1

a. Historical cost accounting causes assets to be significantly understated in a country experiencing high inflation.

b. Balance sheet hedging is a treasury method used by businesses operating with foreign currencies to reduce the potential impact of exchange rate fluctuations in their balance sheet.

The paradox associated with hedging balance sheet exposure is that, by agreeing to receive or deliver foreign currency in the future under a forward contract, a transaction exposure is created.

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