Wichita Corp. is a U.S. manufacturing company that has attempted to capitalize on opportunities to expand in South America by establishing a subsidiary in Argentina. The production costs in Argentina are quite low, and expected to remain lower than in other places where Wichita Corp. operates. Wichita Corp. also expects to be able to sell more than half of its output in Argentina and most of the rest of its output in other South American countries. The problem for Wichita Corp. is that it is concerned about the political climate in Argentina and the possibility the government will make it difficult for Wichita Corp. to do business in Argentina.

a. How will borrowing Argentinian pesos locally from a bank in Argentina most likely affect Wichita Corp.s exposure to exchange rate risk?

1. Borrowing pesos will probably increase Wichita Corp.s exposure to exchange rate risk.
2. Borrowing pesos will probably decrease Wichita Corp.s exposure to exchange rate risk.
3. Borrowing pesos will probably have little effect on increase Wichita Corp.s exposure to exchange rate risk.

b. How will borrowing Argentinian pesos locally from a bank in Argentina most likely affect Wichita Corps exposure to political risk (which is the risk of unfavorable government regulations)?

1. Borrowing pesos will probably increase Wichita Corp.s exposure to political risk.
2. Borrowing pesos will probably decrease Wichita Corp.s exposure to political risk.
3. Borrowing pesos will probably have little effect on increase Wichita Corp.s exposure to political risk.