Question Details

Explain how the impact on the zloty- value will affect the amount of dollar cash flows 




1. Cash Flow Sensitivity to Exchange Rate Movements. The Central Bank of Poland is about to
engage in indirect intervention later today, in which it will lower Poland- interest rates
substantially. This will have an impact on the value of the Polish currency (zloty) against most
currencies because it will immediately affect capital flows. Missouri Co. has a subsidiary in
Poland that sells appliances. The demand for its appliances is not affected much by the local
economy. Most of its appliances produced in Poland are typically invoiced in zloty and are
purchased by consumers from Germany. The subsidiary- main competition is from appliance
producers in Portugal, Spain, and Italy that also export appliances to Germany.
a. Explain how the impact on the zloty- value will affect the sales of appliances by the Polish
subsidiary.
b. The subsidiary owes a British company 1 million British pounds for some technology that the
British company provided. Explain how the impact on the zloty- value will affect the cost of
this technology to the subsidiary.
c. The subsidiary plans to take 2 million zloty from its recent earnings, and will remit it to the
U.S. parent in the near future. Explain how the impact on the zloty- value will affect the amount of dollar cash flows received by the U.S. parent due to this remittance of earnings by
the subsidiary.
2. Applying the Value-at-Risk Method. You use today- spot rate of the Brazilian real to forecast
the spot rate of the real for one month ahead. Today- spot rate is $.4558. Use the value-at-risk
method to determine the maximum percentage loss of the Brazilian real over the next month based
on a 95 percent confidence level. Use the spot exchange rates at the end of each of the last 6
months as shown below to conduct your analysis. Forecast the exchange rate that would exist
under these conditions.




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