Intervention Effects on Corporate Performance
Response to the following problem:
Assume you have a subsidiary in Australia. The subsidiary sells mobile homes to local consumers in Australia, who buy the homes using mostly borrowed funds from local banks. Your subsidiary purchases all of its materials from Hong Kong. The Hong Kong dollar is tied to the U.S. dollar. Your subsidiary borrowed funds from the U.S. parent, and must pay the parent $100,000 in interest each month. Australia has just raised its interest rate in order to boost the value of its currency (Australian dollar, A$). The Australian dollar appreciates against the U.S. dollar as a result.
Explain whether these actions would increase, reduce, or have no effect on:
a. The volume of your subsidiary's sales in Australia (measured in A$).
b. The cost to your subsidiary of purchasing materials (measured in A$).
c. The cost to your subsidiary of making the interest payments to the U.S. parent (measured in A$). Briefly explain each answer.