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QA-27. Exposure of MNCs To Exchange Rate Movements

Arlington Co. expects to receive 10 million euros and needs 2 million Mexican pesos annually for the next 10 years. The euro is currently worth $1.38 and is predicted to lose 2% value yearly, while the peso at $0.13 will lose 2% yearly as well. Based on the exchange rate movements, the depreciating euro will negatively impact Arlington's value, but the depreciating peso may provide some offsetting benefit due to lower costs, though smaller in scale. Overall, the effect is assessed to be unfavorable for Arlington.

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1K views1 page

QA-27. Exposure of MNCs To Exchange Rate Movements

Arlington Co. expects to receive 10 million euros and needs 2 million Mexican pesos annually for the next 10 years. The euro is currently worth $1.38 and is predicted to lose 2% value yearly, while the peso at $0.13 will lose 2% yearly as well. Based on the exchange rate movements, the depreciating euro will negatively impact Arlington's value, but the depreciating peso may provide some offsetting benefit due to lower costs, though smaller in scale. Overall, the effect is assessed to be unfavorable for Arlington.

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hy_saingheng_7602609
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27. Exposure of MNCs to Exchange Rate Movements. Arlington Co.

expects to receive 10
million
euros in each of the next 10 years. It will need to obtain 2 million Mexican pesos in each of
the next 10 years. The euro is presently valued at $1.38 and is expected to depreciate by 2
percent each year. The peso is valued at $.13 and is expected to depreciate by 2 percent each
year. Review the valuation equation for an MNC. Do you think that the exchange rate
movements will have a favorable or unfavorable effect on the MNC?
ANSWER: The movements in the euro are expected to have an unfavorable effect on
Arlingtons value. The expected movements in the peso are expected to have a favorable
effect on Arlingtons value. However, the expected peso effect should be smaller because the
dollar amount of business in pesos is smaller. Thus, the overall effect should be unfavorable.

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