Babylon Co. is a Japanese firm. It has a subsidiary in China that produces computer chips and sells them to European countries. The chips are invoiced in Japanese Yen. The subsidiary pays wages, rent, and other operating costs in China’s currency (Yuan). Every month, the subsidiary remits a large amount of earnings to the Japanese parent. This is the only international business that Babylon Co. has. The subsidiary wants to borrow funds to expand its facilities, and can borrow Japanese Yen at 9 percent annually or borrow Chinese Yuan at 9 percent annually. Which currency should the parent tell the subsidiary to borrow, if the parent's main goal is to minimize exchange rate risk? Explain.

Babylon Co. is a Japanese firm. It has a subsidiary in China that produces computer chips and sells them to European countries. The chips are invoiced in Japanese Yen. The subsidiary pays wages, rent, and other operating costs in China’s currency (Yuan). Every month, the subsidiary remits a large amount of earnings to the Japanese parent. This is the only international business that Babylon Co. has. The subsidiary wants to borrow funds to expand its facilities, and can borrow Japanese Yen at 9 percent annually or borrow Chinese Yuan at 9 percent annually. Which currency should the parent tell the subsidiary to borrow, if the parent's main goal is to minimize exchange rate risk? Explain.

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter20: Short-term Financing

Section: Chapter Questions

Problem 2BIC

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