Question

14. Translation current rate Please refer to Table 4 in the datafile. If Euro Trade applies the current rate method of translation, then it will make a translation if the EUR/USD exchange rate .. (Note: gain=equity increases, loss=equity decreases) a) gain; increases b) impossible to determine c) loss; increases d) loss; decreases

Answer 1

The correct answer is C.

there will be translation loss, if EURO/USD exchange rate increases.

For instance, 1 EURO = USD 1.1 , that means, Euro weakens

Therefore, when 1000 USD is converted to Euro = USD1000/1.1 = EURO 909

1 EURO = USD 1.5, that means, Euro strengthens.

Therefore, when 1000 USD is converted to Euro = USD1000/1.5 = EURO 667

In this example, when Euro to USD rate increases from 1/1.1 to 1/1.5, translation loss comes to EURO 242 (909-667)

therefore, Euro/USD rate increases, there is translation loss.