Suppose that soft cola, a multinational soft-drinks company is thinking about opening a plant in a developing country. The exchange rate in that country is pegged to the dollar but due to economic and political problems in that country, there are restrictions on the convertibility and repatriation of profits to the United States. Also, the level of these restrictions is liable to change with the whims of those in power. The CEO of soft cola calls you a financial economist to evaluate the risks involved in such a venture.

i) Would soft cola face exchange-rate risks if it decided to open a plant in this developing country? What risk would it face and how could it avoid this risk?

ii) If the CEO decides to go ahead and open a plant in the developing country, what in effect has been soft colas risk management strategy?