Exchange Risk Stateside Company has an exposed asset position of approximately 1.85 billion foreign currency units (FCU) in its foreign subsidiary, and you want to convince the executive committee that there is a risk involved. Today’s spot rate is 1,610 FCU to $1.

a. Calculate the potential gain or loss if the exchange rate changes to 1,500 FCU to $1, an increase in value, or if the FCU rate changes to 1,700 FCU to $1, a decrease in value.

Which change should cause more concern? Why?

b. Would the risk of exchange rate fluctuations between the FCU and dollar be of any importance to Stateside Company if it plans to continue to invest additional money in the subsidiary and does not plan to transfer any of the assets of the subsidiary back to the United States in the foreseeable future? Explain.

c. Write a brief memo to the executive committee explaining the exchange risk associated with the foreign subsidiary and outline steps that might be taken to reduce the risk.