Textbook Problem

Cash Flow Sensitivity to Exchange Rate Movements The Central Bank of Poland is about to engage in indirect intervention later today, by which it will lower Poland’s interest rates substantially. This will have an impact on the value of the Polish currency (zloty) against most currencies because it will immediately affect capital flows. Missouri Co. has a subsidiary in Poland that sells appliances. The demand for those appliances is not affected much by the local economy. Most of the firm’s appliances produced in Poland are typically invoiced in zloty and are purchased by consumers from Germany. The subsidiary’s main competition is from appliance producers in Portugal, Spain, and Italy, which also export appliances to Germany.

1. Explain how the impact on the zloty’s value will affect the sales of appliances by Missouri Co.’s Polish subsidiary.
2. The subsidiary owes a British company 1 million British pounds for some technology that the British company provided. Explain how the impact on the zloty’s value will affect the cost of this technology to the subsidiary.
3. The subsidiary plans to take 2 million zloty from its recent earnings and will remit it to the U.S. parent in the near future. Explain how the impact on the zloty’s value will affect the amount of dollar cash flows received by the U.S. parent due to this remittance of earnings by the subsidiary.