A. Compare and contrast transaction exposure, economic exposure and translation exposure. For each type of exposure...

 

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A. Compare and contrast transaction exposure, economic exposure and translation exposure. For each type of exposure explain at least one technique used by multinational corporations to manage this type of exposure. (10 marks) B. Shoffer Inc., exports chairs to Europe (invoiced in U.S. dollars) and competes against local European companies. If purchasing power parity exists, why would Shoffer not benefit from a stronger euro? (6 marks) C. Gheko 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 Gheko Co. expects that the Chinese yuan will continue to be stable against the dollar. The subsidiary's 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. i. 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? Explain. (3 marks) ii. If Gheko Co. had established its subsidiary in Tokyo, Japan instead of China, would its subsidiary's profits be more exposed or less exposed to exchange rate risk? Explain. (3 marks) 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? Explain. iii. (3 marks) A. Compare and contrast transaction exposure, economic exposure and translation exposure. For each type of exposure explain at least one technique used by multinational corporations to manage this type of exposure. (10 marks) B. Shoffer Inc., exports chairs to Europe (invoiced in U.S. dollars) and competes against local European companies. If purchasing power parity exists, why would Shoffer not benefit from a stronger euro? (6 marks) C. Gheko 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 Gheko Co. expects that the Chinese yuan will continue to be stable against the dollar. The subsidiary's 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. i. 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? Explain. (3 marks) ii. If Gheko Co. had established its subsidiary in Tokyo, Japan instead of China, would its subsidiary's profits be more exposed or less exposed to exchange rate risk? Explain. (3 marks) 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? Explain. iii. (3 marks)

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A Transaction Exposure Transaction exposure refers to the risk that arises from the effect of exchange rate fluctuations on a firms contractual cash flows denominated in foreign currencies Techniques ... View the full answer