Question Details

Will the Hong Kong exporters be affected favorably or unfavorably 


1. Assessing Translation Exposure. Kanab Co. and Zion Co. are U.S. companies that engage in
much business within the U.S. and are about the same size. They both conduct some international
business as well.
Kanab Co. has a subsidiary in Canada that will generate earnings of about C$20 million in each of
the next 5 years. Kanab Co. also has a U.S. business that will also receive about C$1 million (after
costs) in each of the next 5 years as a result of exporting products to Canada that are denominated
in Canadian dollars.
Zion Company has a subsidiary in Mexico that will generate earnings of about 1 million pesos in
each of the next 5 years. Zion Co. also has a business in the U.S. that will receive about 300
million pesos (after costs) in each of the next 5 years as a result of exporting products to Mexico
that are denominated in Mexican pesos.
The salvage value of Kanab- Canadian subsidiary and Zion- Mexican subsidiary will be zero in
5 years. The spot rate of the Canadian dollar is $.60 while the spot rate of the Mexican peso is
$.10. Assume the Canadian dollar could appreciate or depreciate against the U.S. dollar by about
8% in any given year, while the Mexican peso could appreciate or depreciate against the U.S.
dollar by about 12% in any given year. Which company is subject to a higher degree of translation
exposure? Explain.
2. Cross-Currency Relationships. The Hong Kong dollar (HK$) is presently pegged to the U.S.
dollar and is expected to remain pegged. Some Hong Kong firms export products to Australia that
are denominated in Australian dollars and have no other business in Australia. The exports are not
hedged. The Australian dollar is presently worth 0.50 U.S. dollars but you expect that it will be
worth 0.45 U.S. dollars by the end of the year. Based on your expectations, Will the Hong Kong exporters be affected favorably or unfavorably ? Briefly explain.




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