Question

1. What causes balance sheet (or translation) exposure to foreign exchange risk? How does balance sheet exposure compare with transaction exposure?

2. In translating a foreign subsidiary's financial statements, what exchange rate should be used for the subsidiary's revenues and expenses?

3. How can a parent corporation determine the functional currency for a foreign subsidiary that conducts business in more than one country?

5. What concept underlies the temporal method of translation? What concept underlies the current rate method of translation? How does balance sheet exposure differ under these two methods?

7. What are the major procedural differences in applying the current rate and temporal methods of translation?