Assume a U.S. firm initiates direct foreign investment in the U.K. If the British pound is expected to appreciate against the dollar, the dollar value of earnings remitted to the parent should ____. The parent may request that the subsidiary ____ in order to benefit from the expectation about the pound.
A) increase; postpone remitting earnings until the pound strengthens
B) decrease; postpone remitting earnings until the pound strengthens
C) decrease; remit earnings immediately before the pound strengthens
D) increase; remit earnings immediately before the pound strengthens

Question

Quizplus · Accepted Answer

If the pound is expected to appreciate against the dollar, it means that each pound earned by the subsidiary will be worth more dollars in the future. Therefore, the parent may request that the subsidiary postpone remitting earnings until the pound strengthens, so that when the remittance is finally made, the parent will receive more dollars for each pound earned. This strategy will allow the parent to benefit from the expected appreciation of the pound. Hence, the dollar value of earnings remitted to the parent should increase, and the best choice is A.