Bafana Corp. is a British MNC. The firm has a subsidiary in Pakistan that manufactures computer chips and sells them to European countries. The sales are invoiced in GBP. The subsidiary’s operating costs are paid in Pakistan’s currency (rupee). Every month, the subsidiary remits a sizable sum of earnings to the parent company. The Pakistani subsidiary is the only international enterprise that Bafana Corp. has. The subsidiary intends to borrow capitals to expand its operations in Pakistan. There are two options: i) the firm can borrow pounds at 7 percent (yearly) ii) the firm can borrow rupee at 7 percent (yearly). Which option is more suitable, if the parent’s main objective is to minimize exchange rate risk?
Bafana Corp. is a British MNC. The firm has a subsidiary in Pakistan that manufactures computer chips and sells them to European countries. The sales are invoiced in GBP. The subsidiary’s operating costs are paid in Pakistan’s currency (rupee). Every month, the subsidiary remits a sizable sum of earnings to the parent company. The Pakistani subsidiary is the only international enterprise that Bafana Corp. has. The subsidiary intends to borrow capitals to expand its operations in Pakistan. There are two options: i) the firm can borrow pounds at 7 percent (yearly) ii) the firm can borrow rupee at 7 percent (yearly). Which option is more suitable, if the parent’s main objective is to minimize exchange rate risk?
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Bafana Corp. is a British MNC. The firm has a subsidiary in Pakistan that manufactures computer chips and sells them to European countries. The sales are invoiced in GBP. The subsidiary’s operating costs are paid in Pakistan’s currency (rupee). Every month, the subsidiary remits a sizable sum of earnings to the parent company. The Pakistani subsidiary is the only international enterprise that Bafana Corp. has. The subsidiary intends to borrow capitals to expand its operations in Pakistan. There are two options:
i) the firm can borrow pounds at 7 percent (yearly)
ii) the firm can borrow rupee at 7 percent (yearly).
Which option is more suitable, if the parent’s main objective is to minimize exchange rate risk?
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