Decko Co. is a U.S. firm with a Chinese subsidiary that produces cell phones in China and sells them in Japan. This subsidiary pays its wages and its rent in Chinese Yuan (RMB), which is stable relative to the dollar. The cell phones sold to Japan are denominated in Japanese Yen (JPY). Assume that Decko Co. expects that the Chinese yuan will continue to stay stable against the dollar. The subsidiary’s main goal is to generate profit for itself and reinvest the profit. It does not plan to remit any funds to the U.S. parent company. Based on this scenario, please answer the following questions:
Suppose that the Japanese Yen strengthens against the U.S. dollar over time. How would this affect the profit earned by the Chinese subsidiary?
Assuming that there are no major country risk issues, why do you believe that Decko Co. established the subsidiary in China instead of Japan?
If the Chinese subsidiary needs to borrow money to finance its expansion and wants to reduce its exchange rate risk, should it borrow U.S. Dollars, Chinese Yuan, or Japanese Yen? You should provide a detailed explanation of your answer.
If Decko Co. had established its subsidiary in Tokyo, Japan, instead of China, would its subsidiary’s profits be more exposed or less exposed to exchange rate risk? Please provide a detailed explanation of your answer.
Please use the PPT as one of the sources (attached in additional materials)