Global Finance 375for hedging purposes. Holding a derivative contract for other than hedging
purposes is normally termed a speculation. It is common for companies to
declare that they do not hold derivatives for speculative purposes: “The Com-
pany does not use financial instruments for speculative or trading purposes,
nor is the Company a party to leveraged derivatives.”^26 The disclaimer on the
use of currency derivatives, as well as leveraged derivatives, is the legacy of
huge losses incurred on certain derivative transactions in the late eighties and
early nineties.
Attention now turns to translation currency risk. Here, currency exposure
results from having foreign subsidiaries or investments in foreign firms that are
accounted for using the equity method.^27
TRANSLATION OF THE STATEMENTS OF
FOREIGN SUBSIDIARIES
A number of new financial and managerial issues were added to the Fashion-
house agenda when it purchased its former Danish supplier. Transactional
issues continue to the extent that (1) Fashionhouse continues to make some
of its purchases from foreign suppliers and (2) the foreign suppliers continue
to invoice Fashionhouse in the foreign currency. In addition, the Danish sub-
sidiary may also have its own transactional exposure. However, with the
emergence of the euro, the Danish subsidiary’s currency exposure should be
limited to the extent that it deals mainly with countries that have adopted
the Euro.^28
Since the Danish company is a wholly owned subsidiary, U.S. GAAP will
call for its consolidation. However, the financial statements of the Danish
subsidiary are in the Danish krone. This introduces a translationalissue; the
Danish subsidiary statements must be restated into dollars before their consol-
idation with its parent, Fashionhouse, can take place. To the extent that the ac-
counting practices used in preparing a subsidiary’s statements differ from
those of their parent, the subsidiary’s statements would need to be restated to
conform to the accounting practices of the parent.^29 This would, of course, be
the case with Fashionhouse and its Danish subsidiary. International GAAP dif-
ferences are discussed in a subsequent section of this chapter.
FINANCIAL STATEMENT TRANSLATION
Translation means that the foreign-currency balances in the financial state-
ments of a foreign subsidiary are restated into U.S. dollars. There is no conver-
sion of currencies, which means that one currency is exchanged for another.
Translation is accomplished by simply multiplying the foreign-currency state-
ment balances by an exchange rate. Translation would be a nonevent if every
balance in the statements of the foreign subsidiary were multiplied by the