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

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Each choice is worth 1 point, which you will receive if you correctly either check or do not check the choice

Question

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

Check all correct answers
Each choice is worth 1 point, which you will receive if you correctly either check or do not check the choice

BlackTom AI · Accepted Answer

An appreciation of the domestic currency reduces the domestic-currency value of foreign-currency‑denominated receipts and foreign assets, while lowering the domestic cost of foreign-currency payments.

1. Relevant knowledge points and concepts
- Currency appreciation: domestic currency becomes stronger, so each unit of domestic currency buys more foreign currency; conversely, a unit of foreign currency converts into fewer domestic currency units.
- Translation/transaction exposure: foreign-currency revenues and asset values fall in domestic-currency terms when the domestic currency appreciates; foreign-currency liabilities or payments cost less in domestic terms.
- Net effect depends on whether cash flows/assets are denominated in foreign currency and whether the firm is a payer or receiver of foreign currency.

2. Step-by-step reasoning
- Identify which cash flows or asset values are in foreign currency.
- Translate a foreign-currency amount into domestic currency before and after appreciation to see the impact.
- Compare results to determine gain or loss in domestic-currency terms.

3. Example calculations (all intermediate steps shown)
- Suppose a domestic company receives €1,000. Initial rate: 1 EUR = $1.20 → domestic receipts = €1,000 × $1.20 = $1,200.
- After domestic currency appreciation, new rate: 1 EUR = $1.10 → domestic receipts = €1,000 × $1.10 = $1,100.
- Change = $1,100 − $1,200 = −$100 (loss). Thus receiving foreign payment is hurt.
- For assets overseas worth €10,000: initial $ value = €10,000 × $1.20 = $12,000; after appreciation = €10,000 × $1.10 = $11,000 → $1,000 loss.
- For making a payment of €1,000: initial cost $1,200 → after appreciation $1,100 → benefit (cost falls by $100), so not hurt.

4. Why the correct answers are correct
- A domestic company with assets overseas holds foreign-currency-denominated assets; appreciation reduces their domestic-currency valuation, hurting reported value and potential balance-sheet strength.
- A domestic company receiving payment in a foreign currency converts those receipts into fewer domestic currency units after appreciation, reducing revenues in domestic terms.

5. Why the other option is incorrect
- A domestic company making payment in a foreign currency benefits from appreciation because the domestic currency buys more foreign currency, so its domestic-currency payment amount falls. It is not hurt.

6. Conclusion
- The correct answers are: "a domestic company with assets overseas" and "a domestic company receiving payment in a foreign currency," which matches the provided answer.

Which of these would by hurt by an appreciation of their domestic currency? Check all correct answers Each choice is worth 1 point, which you will receive if you correctly either check or do not check the choiceMultiple choice

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