The Central Bank of Romania is about to engage in indirect intervention. It is expected that Romania
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Question:
The Central Bank of Romania is about to engage in indirect intervention. It is expected
that Romanias interest rates will be lowered substantially. Lower interest rates will have
an impact on the value of the Romanian currency The Leu against most currencies
because it will immediately affect capital flows. Texas Co a US based firm, has a
subsidiary in Romania that sells electrical equipment. The demand for its products is not
affected much by the local Romanian economy. Most electrical equipment produced in
Romania are typically invoiced in Leu. There has been a surge in demand from French
consumers for such equipment in recent years. The subsidiarys main competition is from
producers based in Italy that also export electrical equipment to France.
i How the impact on the Leus value will affect the sales of electrical equipment by
the Romanian subsidiary? Explain
ii The Romanian subsidiary plans to remit million Leu from its recent earnings to
the US parent in the near future. Explain how the impact on the Leus value will
affect the amount of dollar cash flows received by the US parent due to this
remittance of earnings by the subsidiary.
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