International Finance (FIN631-1503D-01)
Unit 4 Discussion Board
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, which is stable against the dollar. The cell phones sold to Japan are denominated in Japanese yen. Assume that Decko Co. expects that the Chinese yuan will continue to stay stable against the dollar.
Please answer the following questions:
1-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:
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’s 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-China has kept the yuan undervalued by anywhere from 15–40%, depending upon the research that has been done. It has done this to keep its currency weaker than it might otherwise be. Do you think the United S
International Finance (Fin631 1503 D 01)
Length: 2 pages (550 Words)
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?
The strengthening of the Japanese Yen against the dollar will increase the profits earned by the Chinese subsidiary. This is because it will lead to a considerable increase in the value of the sales of the company. With the strengthening of the Japanese Yen, imports into the country will increase in terms of its value (Bartram, 2010). If for example the Japanese market imported 1000 cellphones each at 200 yen and the exchange rate being 87 yen/dollar, this would result in sales worth $2,298. When the yen appreciates against the dollar to say 84 yen/$, the same amount of sales would be worth $2, 380 representing an increase in value. This can also be explained from the perspective of the Japanese market. With the strengthening of their currency, imports into the market become cheaper and this leads to an increase in the demand for imports.
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