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3. Hedging translation exposure with forward contracts 1. 2. STEP: 1 of 2 Suppose that Warner Co is a U.S.-based MNC with a major subsidiary in France. This French subsidiary deals in euros, and is expected to earn 35 million euros next year. However, as these euros will stay with the subsidiary in France, Warner is concerned about translation exposure. To hedge against this translation exposure, Warner decides to sell 35 million euros forward. Warner can then purchase euros at the prevailing spot rate in one year to fulfill the forward contract. Suppose that the forward rate for euros is $1.30 and the spot rate for euros currently is also $1.30. If the euro depreciates to a weighted average exchange rate of $1.10 in one year, than the translated earnings for the French subsidiary will be $ million. However, if the value of the euro remains at $1.30, the translated earnings of the French subsidiary would be $ million. This means that a depreciation of the euro would cause the translated earnings of the French subsidiary to increase Grade Step 1 E: 0/2 decrease (to complete this step and unlock the next step) 3. Hedging translation exposure with forward contracts 1. 2. STEP: 1 of 2 Suppose that Warner Co is a U.S.-based MNC with a major subsidiary in France. This French subsidiary deals in euros, and is expected to earn 35 million euros next year. However, as these euros will stay with the subsidiary in France, Warner is concerned about translation exposure. To hedge against this translation exposure, Warner decides to sell 35 million euros forward. Warner can then purchase euros at the prevailing spot rate in one year to fulfill the forward contract. Suppose that the forward rate for euros is $1.30 and the spot rate for euros currently is also $1.30. If the euro depreciates to a weighted average exchange rate of $1.10 in one year, than the translated earnings for the French subsidiary will be $ million. However, if the value of the euro remains at $1.30, the translated earnings of the French subsidiary would be $ million. This means that a depreciation of the euro would cause the translated earnings of the French subsidiary to increase Grade Step 1 E: 0/2 decrease (to complete this step and unlock the next step)

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