Problem:
SkyeTravel Agency specializes in tours for American tourists. Until recently, all of Its business was in the Switzerland. It just established a subsidiary in Athens, Greece, which provides tour services in the Greek islands for American tourists. It rented a shop near the port of Athens. It also hired residents of Athens who could speak English and provide tours of the Greek islands. The sub subsidiary's main costs are rent and salaries for its employees and the lease of a few large boats in Athens that it uses for tours. American tourists pay for the entire tour in dollars at Skye's main U.S. office before they depart for Greece.
Required:
a. Explain whySkye may be able to effectively capitalize on international opportunities such as the Greek island tours.
b. Skye is privately owned by owners who reside in the United States and work in the main office. Explain possible agency problems associated with the creation of a subsidiary in Athens, Greece. How canSkye attempt to reduce these agency costs?
c. Greece's cost of labor and rent are relatively low. Explain why this information is relevant to Skye's decision to establish a tour business in Greece.
d. Explain how the cash flow situation of the Greek tour business exposes Skye to exchange rate risk. IsSkye favorably or unfavorably affected when the euro (Greece's currency) appreciates against the dollar? Explain.
e. Skyeplans to finance its Greek tour business. Its subsidiary could obtain loans in euros from a bank in Greece to cover its rent, and its main office could pay off the loans over time. Alternatively, its main office could borrow dollars and would periodically convert dollars to euros to pay the expenses in Greece. Does either type of loan reduce the exposure ofSkye to exchange rate risk? Explain.
f. Explain how the Greek island tour business could exposeSkye to country risk.