Accounting or Translation Exposures Give Rise to Gains or Losses

Multiple Choice

Accounting or translation exposures give rise to gains or losses (in most cases) if the exchange rate between the local currency and the reporting currency changes. When considering whether these exposures should be hedged, the following points are considered to be valid except

A) If the temporal method for translation is required, the gains or losses must flow through the income statement thus affecting taxes paid and reported net income.
B) Because it is possible that gains during one accounting period will be offset by losses during the next one, there is little reason to engage in costly economic transactions (even if the cost is low) to offset risks that might be reversed by themselves and, anyway, have no impact on economic cash flows.
C) If the company has debt covenants specifying minimum accounting ratios, because accounting gains and losses affect consolidated equity, it is conceivable that a debt ratio covenant could be violated if a company has significant translation losses, so hedging may deserve consideration.
D) If there is hyperinflation in a country and it is unlikely to be reversed in the future, then exposed assets will lose value and hedging may deserve consideration.
E) None of the statements above; all are correct.