Question

31. MNC Cash Flows and Exchange Rate Risk Tuscaloosa Co. is a U.S. firm that assembles phones in Argentina and transports the final assembled products to the parent, where they are sold by the parent in the United States. The assembled products are invoiced in dollars. The Argentine subsidiary obtains some material from China, and the Chinese exporter is willing to accept Argentine pesos as payment for these materials that it exports. The Argentine subsidiary pays its employees in the local currency (pesos), and finances its operations with loans from an Argentine bank (in pesos). Tuscaloosa Co. has no other inter- national business. If the Argentine peso depreciates against the dollar over time, will that have a favorable, unfavorable, or neutral effect on Tuscaloosa Co.? Briefly explain.

Answer 1

It will have neutral effect on Tuscaloosa Co. Since the Argentine subsidiary finances its own operations i.e. it borrows in own currency, make payments in own currency, it is not required to convert dollar into pesos at any point in time. Therefore, there will be no effect of depreciation of pesos against dollar.