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Sir in this question’s 1)b) under foreign exchange risk I understand that when Noria’s currency depreciates, any imports from its foreign supplier will become expensive and eat into its profitability. However I do not understand how translating its assets and liabilities which are in the foreign countries would be LOWER( I believe that’s what the examiner’s answer implies when he says “negatively impacting on declared profit”) when converted to Norian currency, aren’t they likely to increase in value?
Assume $S as southland currency and $N as Noria’s currency
now $S1 = $N100
after severe recession in Noria $1S=$N200
So if $S500 net assets in Southland, then it will be $N10,000 in post-recession period compared to $N5000 in pre-recession period.It doesn’t say ‘lower’:
“Therefore, the current business model exposes the company to volatility in the relative movement of exchange rates which could POTENTIALLY result in higher costs, consume excess cash and reduce corporate profitability. As a listed company in Noria, SmartWear will have to
prepare its financial statements in the Norian currency. This requires the value of assets and liabilities held in each operating country to be translated to the Norian currency, again POSSIBLY negatively impacting on declared profit.
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