Question

4. Impact of Exchange Rate Movements. Plak Co. of Chicago has several European subsidiaries that remit earnings to it each year. Explain how appreciation of the euro (the currency used in many European countries) would affect Plak's valuation

5. Exposure to Exhange Rates. McCanna Corp., a U.S. firm, has a French subsidiary that produces wine and exports to various European countries. All of the countries where it sells its wine use the euro as their currency, which is the same as the currency used in France. Is McCanna Corp. exposed to exchange rate risk?

Answer 1

4. When the parent company has several European subsidiaries and when there will be appreciation of European Euro,it will mean that the overall receivables of the company will be increasingly cause they have to remit their earnings back to the Chicago, and it would be leading into high valuation for the company because the overall increase in their receivables will be accounted in the books of account so even if the relative dollar has gone down, the overall receipts of the company will be going up due to depreciation of dollar and appreciation of Euro.

It would be leading to INCREASE in the valuation of Plak.

5. YES, the company is exposed to the exchange rate risk because the subsidiary of the company is earning in Euro, whereas the parent company exchange rate is related to Dollar, because it is an American company ,So, it can be seen that this company will be exposed to translation risk as it has a subsidiary in other country because it will have to incorporate the books of account of that subsidiary in its own books so it will be exposed to translation risk of exchange rate