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Hi sir, for the following question below i understand that is a translation risk. But i dont understand why is it harmful. Could you explain ?
Qn: For the following scenario, state which type of exchange rate risk the UK company is facing and whether this risk is beneficial or harmful in nature.
Scenario: A UK company has purchased a factory in France but has financed its purchase with sterling borrowing. Over the next year, the pound is expected to appreciate against the Euro.
Answer: Translation risk; harmful.
If the pound is appreciating then the pound value of the factory will be lower, but the amount owing on the borrowing will stay the same. Therefore it is harmful.