value of the foreign currency can occur. For example, U.S. companies must translate Euro, Pound, Yen, etc., statements into U.S. dollars. A foreign subsidiary's income statement and balance sheet are the two financial statements that must be translated. A subsidiary doing business in the host country usually follows that country's prescribed translation method, which may vary, depending on the subsidiary's business operations. Subsidiaries can be characterized as either an integrated or a self-sustaining foreign entity. An integrated foreign entity operates as an extension of the parent company, with cash flows and business operations that are highly interrelated with those of the parent. A self-sustaining foreign entity operates in its local economic environment, independent of the parent company. Both integrated and self-sustaining foreign entities operate use functional currency, which is the currency of the primary economic environment in which the subsidiary operates and in which day-to-day operations are transacted. Management must evaluate the nature of its foreign subsidiaries to determine the appropriate functional currency for each. There are three translation methods: current-rate method, temporal method, and U.S. translation procedures. Under the current-rate method, all financial statement line items are translated at the "current" exchange rate. Under the temporal method, specific assets and liabilities are translated at exchange rates consistent with the timing of the item's creation. The U.S. translation procedures differentiate foreign subsidiaries by functional currency, not subsidiary characterization. If a firm translates by the temporal method, a zero net exposed position is called fiscal balance. The temporal method cannot be achieved by the current-rate method because total assets will have to be matched by an equal amount of debt, but the equity section of the balance sheet must be translated at historical exchange rates. Measuring risk If foreign-exchange markets are efficient—such that purchasing power parity, interest rate parity, and the international Fisher effect hold true—a firm or investor need not concern itself with foreign exchange risk. A deviation from one or more of the three international parity conditions generally needs to occur for there to be a significant exposure to foreign-exchange risk. Financial risk is most commonly measured in terms of the variance or standard deviation of a quantity such as percentage returns or rates of change. In foreign exchange, a relevant factor would be the rate of change of the foreign currency spot exchange rate. A variance, or spread, in exchange rates indicates enhanced risk, whereas standard deviation represents