1. (Country Risk Rating - Checklist Approach) Deco Co. is a U.S. firm considers to establish a Mexican subsidiary that produces some electronic products in Mexico and sells them in Canada. This subsidiary pays its wages and its rent in Mexican pesos. The cell phones sold to Canada are denominated in Canadian dollar. Assume that Deco Co. expects that the Mexican peso will continue to stay stable against the dollar. The subsidiary's main goal is to generate profits for itself and it reinvests the profits. It does not plan to remit any funds to the U.S. parent.

Decko Inc. would like to assess the country risk of Mexico first. Decko has identified various

1

political and financial risk factors, as shown below.

Political Risk Factor

Blockage of fund transfers Bureaucracy

Financial Risk Factor

Interest rate Inflation Exchange rate

Assigned Rating

3 5

Assigned Rating

5 4 1

Assigned Weight

60% 40%

Assigned Weight

50% 35% 15%

a. (1 point) Decko has assigned an overall rating of 60 percent to political risk factors and of 40 percent to financial risk factors.

a. No, since the overall rating calculated is 3.53 smaller 3.70.

b. Yes, since the overall rating calculated is 4.05 greater than 3.70. c. Yes, since the overall rating calculated is 3.80 greater than 3.70. d. No, since the overall rating calculated is 3.40 smaller than 3.70. e. Yes, since the overall rating calculated is 3.90 greater than 3.70. ANS: Please show your calculation.

b (1 point) If Deco Co. establishes the subsidiary in Mexico and later finds out that the Mexican subsidiary needs to borrow money to finance its expansion, which currency should the Mexicane subsidiary borrow in order to reduce its exchange rate risk?

(A) U.S. dollar

(B) Canadian dollar (C) Mexican Peso