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B Ltd is a European company that owns 100% of the equity in C, an African company. C’s home country has high inflation. C buys all of its raw materials from B and manufactures products, most of which are then exported to neighboring African countries that generally have stronger economies and lower inflation than C’s home country. C uses its home currency to pay B. which of the following statements is correct? Select all apply.
a. B Ltd is exposed to transaction risks. The currency received from C is likely to decline over time because of the anticipated inflation in the African country
b. C will be exposed to a translation risk because B Ltd will almost certainly have to reflect the declining exchange rates in selling prices. That could make it difficult for the subsidiary to make a profit
c. C will be exposed to economic risk because it will almost certainly have to reflect the declining exchange rates in selling prices. That could make it difficult for C to make a profit
d. An alternative would be for B Ltd to investigate whether it could import anything from C’s home country in order to create a natural hedge
e. B Ltd will be exposed to transaction risks as currency will appreciate over time because of the expected inflation in the African country
Ans A, C, D
Why is C an answer? From Pearson VueI can’t see it either.
Say current exchange rate for C vs Neighbouring country 2$C = 1$N
In a year, say rate is 3$C = 1$N
So if C sells a product fot 1000 $N it will receive 2000 $C now and 3000 $C in a year. That is an improvement.
However, it is also buying in raw material and that is more expensive as Cs currency gets weaker. Seems to me it depends on the relative inflation rates.
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