MNC Cash Flows and Exchange Rate Risk. Asheville Co. is Canadian and has a subsidiary in Mexico that develops software for its parent. It rents a large facility in Mexico and hires many people in Mexico to work in the facility. Ashville Co. All operations are presently funded by Ashevilles parent in Canada. All the software is sold to U.S. firms by Ashevilles parent and invoiced in Canadian dollars.

a) If the Mexican peso and the U.S. dollar both appreciate against the Canadian dollar, does this have a favorable effect, unfavorable effect, or no effect on Ashevilles value? Explain. 4 Marks

b) If Ashville needs to borrow peso from one month to another to meet payroll expenses until it converts some Canadian dollars to pesos, which international financial market is it likely to use? 2 Marks

c) In future, Asheville Co. plans to borrow funds which it will repay over 25 years, to build its own offices in Mexico to support its expansion of sales in the U.S., which international financial market is it likely to use? 2 Marks

d) If the Mexican interest rates are presently lower than U.S. interest rates, and Asheville obtain loans denominated in Mexican pesos in order to support its expansion in the U.S. Will the borrowing of pesos increase, decrease, or have no effect on Ashville Co.s exposure to the risk that the exchange rate will change? Briefly explain. 4 Marks

12 Marks