Consider the balance sheet of a U.S. firm exporting to Europe. Euro- denominated accounts have been translated into U.S. dollars at the current exchange rate.
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Cash (in $s)
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$40,000
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Wages payable (in $s)
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$40,000
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Accts receivable (in $s)
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$30,000
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Accts payable (in $s)
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$70,000
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Accts receivable (in s)
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$60,000
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Bank note due (in s)
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$10,000
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Inventory (in $s)
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$20,000
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Total current liabilities
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$120,000
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Total current assets
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$150,000
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Bank note (in s)
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$50,000
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Plant and equipment
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$50,000
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Common equity
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$30,000
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Total assets
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$200,000
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Total liabilities & equity
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$200,000
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This firm considers inventory to be a real, rather than a monetary, asset.
a. What is the dollar value of the firm's monetary assets? What is the dollar value of the firm's monetary liabilities? What is the dollar value of net monetary assets?
b. What is the dollar value of the firm's monetary assets exposed to currency risk? Exposed monetary liabilities? Net exposed monetary assets (exposed monetary assets less exposed monetary liabilities)?
c. This firm has a bank note denominated in euros. Does this foreign currency liability increase or reduce the firm's net monetary exposure to currency risk? Explain.
d. Is the operating performance of a U.S. exporter such as this likely to be improved or worsened by a real appreciation of the euro? Explain.