CHAPTER 10 QUIZ 27
Exposure of an MNC- Subsidiary. Decko Co. is a U.S. firm with a Chinese subsidiary that
produces cell phones in China and sells them in Japan. This subsidiary pays its wages and its rent
in Chinese yuan. The cell phones sold to Japan are denominated in Japanese yen. Assume that
Decko Co. expects that the Chinese yuan will continue to be stable against the dollar. The
subsidiary- main goal is to generate profits for itself and it reinvests the profits. It does not plan to
remit any funds to the U.S. parent.
a. Assume that the Japanese yen strengthens against the U.S. dollar over time. How would this
be expected to affect the profits earned by the Chinese subsidiary?
b. If Decko Co. had established its subsidiary in Tokyo, Japan instead of China, would its
subsidiary- profits be more exposed or less exposed to exchange rate risk?
Chapter 10: Measuring Exposure to Exchange Rate Fluctuations 159
c. Why do you think that Decko Co. established the subsidiary in China instead of Japan?
Assume no major country risk barriers.
d. If the Chinese subsidiary needs to borrow money to finance its expansion and wants to reduce
its exchange rate risk, should it borrow U.S. dollars, Chinese yuan, or Japanese yen?
USA 
India