A domestic firm, Home Company, is evaluating the effect of an appreciation in th

Question

A domestic firm, Home Company, is evaluating the effect of an appreciation in the home currency on the firm's economic exposure. In each of the following categories of economic exposure, indicate whether the domestic currency appreciation is likely to have a positive or negative effect on Home Company's cash flow. State your conclusion and offer an one-sentence explanation for you conclusion as in the example shown for the first row.

Direct economic exposure

Revenue from sales abroad ? negative - foreign revenue worth less in home currency terms

Cost of inputs sourced (purchased) abroad ?

Profits repatriated from abroad ?

Foreign tax liabilities ?

Indirect economic exposure

Position vis-à-vis a competitor who sources abroad ?

Domestic competitor who sells abroad ?

Foreign competitor who sells in Home Co.'s country ?

Supplier who sources abroad ?

Customer who sells abroad ?   

Customer who sources abroad ?

Explanation / Answer

currency terms

Cost of inputs sourced (purchased) abroad ? Positive as now inputs will cost less in domestic currency

Profits repatriated from abroad ? Negitive as Profit will now ne less in domestic currency terms

Foreign tax liabilities ? Postive as tax liabilities will be less in domestic currency terms as domestic currency has appriciated.

Indirect economic exposure

Position vis-à-vis a competitor who sources abroad ? Negitive as competitor now can source cheap, so will ocst less than domestic firm.

Domestic competitor who sells abroad ? Negitive as he will get less price in domestic currency for the same product

Foreign competitor who sells in Home Co.'s country ? Positive as foreign competittor will get more price for same product in foreign currency terms.

Supplier who sources abroad ? Positive as domestic currency appreciatees so can source at lower cost .

Customer who sells abroad ? Negitive as now will get less value in domestic currency terms .   

Customer who sources abroad ? Positive as now can purchase the same product at cheaper price in domestic currency teerms.

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.