14 Assessing economic exposure Harvey Limited plans to create and finance a subsidiary in Malaysia that produces computer components at low cost and exports them to other countries. It has no other international business. The subsidiary will produce computers and export them to Japan, and it will invoice the products in Australian dollars. The value of the Japanese yen is expected to remain very stable against the Australian dollar. The subsidiary will pay wages, rent and other operating costs in Malaysian ringgit. The subsidiary will remit earnings monthly to the parent.

a Would Harvey’s cash flows be favourably or unfavourably affected if the Malaysian ringgit depreciates over time?

b Assume that Harvey considers partial financing of this subsidiary with ringgit loans from Malaysian banks instead of providing all the financing with its own funds. Would this alternative form of financing increase, decrease or have no effect on the degree to which Harvey is exposed to exchange rate movements of the ringgit?