MNC Cash Flows and Exchange Rate Risk Asheville Co. has a subsidiary in Mexico that develops software for its parent. It rents a large facility in Mexico and hires many people in Mexico to work in the facility. Asheville Co. has no other international business. All operations are presently funded by Asheville’s parent. All the software is sold to U.S. firms by Asheville’s parent and invoiced in U.S. dollars.
a. If the Mexican peso appreciates against the dollar, does this have a favorable effect, unfavorable effect, or no effect on Asheville’s value?
b. Asheville Co. plans to borrow funds to support its expansion in the United States. The Mexican interest rates are presently lower than U.S. interest rates, so Asheville obtains a loan denominated in Mexican pesos in order to support its expansion in the United States. Will the borrowing of pesos increase, decrease, or have no effect on its exposure to exchange rate risk? Briefly explain.
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