Chapter 10 10. The consolidated earnings will be increased due to the strength of the subsidiaries’ local currency (the euro). The consolidated earnings will be reduced due to the weakness of the subsidiaries’ local currencies. 15. If purchasing power parity exists, a stronger euro would occur only because the U.S. inflation is higher than European inflation. Thus, the European demand for Boulder’s chairs may not be affected much since the inflated prices of U.S.made chairs would have offset the European consumer’s ability to obtain cheaper dollars. The European consumer’s purchasing power of European chairs versus U.S. chairs is not affected by the change in the euro’s value. Chapter 11 1. The net exposure to Currency 1 is 120,000 units; the net exposure to Currency 2 is –140,000 units; the net exposure to Currency 3 is –150,000 units. 11. If the firm uses the forward hedge, it will pay out 300,000($.400) = $120,000 in 90 days. If the firm uses a money market hedge, it will invest (300,000/1.03) = 291,262 ringgit
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