Question Details

You want to assess the data in a logical manner 


1. 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?
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?


2. Assessing Exchange Rate Risk. Washington Co. and Vermont Co. have no domestic business.
They have a similar dollar equivalent amount of international exporting business. Washington Co.
exports all of its products to Canada. Vermont Co. exports its products to Poland and Mexico, with
about half of its business in each of these 2 countries. Each firm receives the currency of the
country where it sends its exports. You obtain the end-of-month spot exchange rates of the
currencies mentioned above during the end of each of the last 6 months.
End of Month Canadian Dollar Mexican Peso Polish Zloty
1 $0.8142 $.09334 $.29914
2 0.8176 .09437 .29829
3 0.8395 .09241 .30187
4 0.8542 .09263 .3088
5 0.8501 .09251 .30274
6 0.8556 .09448 .30312
You want to assess the data in a logical manner to determine which firm has a higher degree of
exchange rate risk. Show your work and write your conclusion.



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