Question

6. Identify whether the following create substantial transaction, operating, and/or translation exposure (or no exposure at all) for a U.S. company, and how the company will be affected if the foreign currency depreciates. The examples will typically create more than one type of exposure.

d) Widgets International (WI) purchases a British factory, financed by issuing dollar debt and

swapping for pound-denominated debt. WI is expecting a steady stream of pound revenues

from the factory, FASB 52 is in effect.

Answer 1

Answer.

Widgets International (WI) purchases a British factory, financed by issuing dollar debt and

swapping for pound-denominated debt is a type of translation exposure.

When the U.S. dollar depreciates relative to a foreign currency(pound), it takes more dollars to get the same amount of that foreign currency(pound). Dollar depreciation means it’s more expensive for a domestic business to convert U.S. dollars to a foreign currency(pound) and cheaper for a foreign business to convert its currency(pound) to U.S. dollars and vise versa.