Could somebody please explain this to me, this came out of a practise exam.
"In a hyperinflationary environment, the parent company can reduce translation losses by reducing its net monetary assets or increasing its net monetary liabilities. In order to do this, the parent should issue debt denominated in the subsidiary’s local currency and invest the proceeds in fixed assets for the subsidiary to use in its operations. "
Lets assume US GAAP:
The firm will have to translate net monetary assets at the current rate (which is worse than the historic). It will lose out on the translations adjustments if the subsidiary holds cash, as the cash is worth less now than it was say 6months ago.
The firm could issue debt, and purchase fixed assets which will be translated at the historic rates, i.e. they will lock in a rate which is the date they purchase the asset.
In otherwords, buying fixed assets (non monetary) will enable the firm to lock in a good historic rate. Holding cash will just mean translating at poorer current rate.
Hope this helps.x
this is good. thanks