Assume an MNC establishes a subsidiary where it has no other existing business. The present value of parent cash flows from this subsidiary is more sensitive to exchange rate movements when:
A) the subsidiary finances the entire investment by local borrowing.
B) the subsidiary finances most of the investment by local borrowing.
C) the parent finances most of the investment.
D) the parent finances the entire investment.

Question

Quizplus · Accepted Answer

When the parent finances the entire investment, the cash flows are more exposed to exchange rate fluctuations because the parent company will need to convert more foreign currency back to its home currency, making it more sensitive to exchange rate changes.

Assume an MNC Establishes a Subsidiary Where It Has No