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(A) Below are the forecasted gross margins for company A's foreign subsidiary. As CFO, you are forecasting a 25% devaluation of the local currency. Please calculate the subsidiary's local currency exposure and its potential loss in the event of a 25% devaluation of the local currency, (B) In anticipation of the devaluation, what actions would you consider to reduce the subsidiary's local currency exposure.

Company A L.C. Rate US$

Sales - L.C. 625 0.40 250

Sales - US$ 125 0.40 50

Sales - Total 750 0.40 300

COGS - L.C. 425 0.40 170

COGS - US$ 250 0.40 100

COGS - Total 675 0.40 270

Gross Margin 75 0.40 30

Explanation / Answer

Since local currency will devalue, the 1$ = 0.3LC

Gross margnin will become = 75*0.3 = 22.5, a decrease of 7.5

Action to take is

1. Shorting local currency

2. Going long on US$

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