Which of these would by hurt by an appreciation of their domestic currency?

Question

BlackTom AI · Accepted Answer

An appreciation of the domestic currency reduces the domestic-currency value of payments or holdings denominated in foreign currency, so both types of firms described suffer when the home currency strengthens.

Relevant knowledge points and concepts
- Currency appreciation means one unit of domestic currency buys more foreign currency; conversely, one unit of foreign currency converts into fewer domestic currency units. 
- Firms that receive foreign-currency revenues or hold foreign assets convert those foreign-currency amounts into domestic currency for reporting and spending; a stronger home currency means those converted domestic values fall.

Step-by-step reasoning with calculations
1. Suppose the domestic currency is the dollar (USD) and the foreign currency is the euro (EUR). Initial exchange rate: 1 EUR = 1.20 USD.
2. A domestic company receives 100,000 EUR. At the initial rate this equals 100,000 × 1.20 = 120,000 USD.
3. If the domestic currency appreciates so the rate becomes 1 EUR = 1.00 USD, the same 100,000 EUR now converts to 100,000 × 1.00 = 100,000 USD. The company receives 20,000 USD less when converting — a clear loss.
4. For a domestic company holding overseas assets worth 1,000,000 EUR: initially valued at 1,000,000 × 1.20 = 1,200,000 USD. After appreciation to 1 EUR = 1.00 USD the asset is worth 1,000,000 USD — a 200,000 USD reduction in domestic-currency value.

Why the correct answer is correct
Both receiving foreign-currency payments and holding foreign assets expose firms to translation and transaction losses when the domestic currency strengthens; both categories therefore are hurt.

Why other options are incorrect
- “A domestic company receiving payment in a foreign currency” alone is true but incomplete: the company with overseas assets is also harmed. 
- “A domestic company with assets overseas” alone is likewise true but omits the receivable case. 
- “Neither of these” is wrong because both suffer reduced domestic-currency values upon appreciation.

Conclusion
Both of these is the correct choice, matching the provided answer.

Which of these would by hurt by an appreciation of their domestic currency?Single choice

Similar Questions

The exchange rate is best defined as:

Demand for the country’s exports falls. This would cause its currency to:

The country’s trade partners impose tariffs on its exports. This would cause its currency to:

The country imposes tariffs on imports. This would cause its currency to:

The nominal exchange rate is the:[Fill in the blank]

Appreciation of a currency will lead to:[Fill in the blank]

Which of the following groups will be unhappy if the Australian dollar appreciates?[Fill in the blank]

For a domestic exporter with all costs and output prices denoted in the domestic currency, an appreciation of the domestic currency will:

More Practical Tools for Students Powered by AI Study Helper

Homework AI Solver

Stylized AI Paper Writer

Plagiarism Checker Assistant

Citation AI Academic Writing Tool

In-Class Translation Assistant

AI Note Generator

AI Quiz Answers

Past Exam Questions from University Test Bank

Smart Practice Assistant

Adaptive Practice

Making Your Study Simpler