5. Woolsey Corporation, based in California, has a subsidiary in Thailand that produces airplane components. The subsidiary sells the components to airplane manufacturers in the U.S. The components are invoiced in U.S. dollars. Woolsey Corporation pays employees of the subsidiary in Thai baht and makes a large monthly lease payment in Thai baht. The parent financed the investment in the Thai subsidiary by borrowing dollars from a bank in California. Woolsey has no other international business.

a. (6 points) Given the conditions, is Woolsey Corporation affected favorably or unfavorably (or not affected) by depreciation of the Thai baht? Briefly explain.

b. (6 point) Assume that interest rates in Thailand declined recently, so Woolseys subsidiary considers obtaining a new loan in Thai baht from a local bank in Thailand. Woolsey Corporation would use the proceeds to pay off its existing loan from the California bank. Will this form of financing increase, reduce, or have no impact on its economic exposure to exchange rate movements? Briefly explain.

c. (6 points) How will the financing arrangement from part b (i.e., borrowing new funds denominated in Thai baht from a bank in Thailand and using the borrowed funds to pay off the loan from the California bank) affect Woolsey Corporationsexposure to political risk?