Consider a U.S.-based MNC with a wholly-owned Italian subsidiary.Following a depreciation of the dollar against the euro,which of the following conclusions are correct?

Question

Quizplus · Accepted Answer

A depreciation of the dollar against the euro means that the euro will be worth more in relation to the dollar. This means that the U.S. parent company will have to convert more dollars to euro to meet the same cash flow needs of its Italian subsidiary. This could alter the competitive position of the subsidiary in the local marketplace if it leads to an increase in prices. At the same time, the higher euro cash flow will be converted to a higher U.S. dollar cash flow for the parent company. Therefore, both A and B are correct, making C the best choice.