A company has just acquired a 50% equity stake in a textile manufacturing company for TND 40 M (or EUR 20 M as the spot exchange rate between the Tunisian Dinar (TND) and the Euro (EUR) is 2 TND/EUR) from the company's Tunisian founder. The remaining 50% of the equity is still owned by the founder who manages the day-to-day operations of the joint venture (JV).
The JV purchases high quality yarn from the French parent company at market prices and uses local Tunisian labor (which is relatively cheaper than French labor) to manufacture clothing for the European market. 100% of the manufactured goods are sold under the French company's label in Europe with the JV receiving the wholesale price paid by European retailers.
Describe the French company's economic exposure to the Tunisian Dinar (TND). Is the French company long, short, or neutral relative to the Tunisian Dinar?
If the French company is exposed to the TND, is the French firm exposed to nominal or real changes in the TND/EUR exchange rate? Explain.
Explain the economic exposure to the EUR from the perspective of the Tunisian JV partner. Explain.
Provide one recommendation how the French company could hedge its exposure to the TND. Explain.
Give one reason why the French company might want to hedge its exposure to the TND. Explain.