Apa Style3 Paragraphsdecko Co Is A US Firm With A Chinese Su

Apa Style3 Paragraphsdecko Co Is A Us Firm With A Chinese Subsidiar

Decko Co. is a U.S. firm with a Chinese subsidiary that produces cell phones in China and sells them in Japan. The subsidiary pays its wages and rent in Chinese yuan, which remains stable against the U.S. dollar. The cell phones sold to Japan are denominated in Japanese yen. The company expects the Chinese yuan to remain stable against the dollar over time. The subsidiary’s primary goal is to generate profits for itself, which it reinvests locally, without remitting funds to the parent company in the U.S.

When considering the impact of exchange rate movements, if the Japanese yen strengthens against the U.S. dollar, the profits earned by the Chinese subsidiary are likely to be affected. Specifically, a stronger yen would mean that revenue from sales in Japan, denominated in yen, would translate into higher U.S. dollar values when converted. However, since the subsidiary's costs are paid in Chinese yuan, which is stable against the dollar, the profit margins could increase due to favorable currency translation effects. Conversely, if the yuan were to weaken significantly against the dollar, it could erode profit margins, especially if the revenue was converted at less favorable rates. If Decko Co. had established its subsidiary directly in Tokyo instead of China, the company's profits would likely be more exposed to exchange rate risk. This is because operating in Japan would expose revenue and costs more directly to fluctuations between the yen and dollar, increasing overall currency risk, whereas the Chinese yuan's relative stability provides a hedge for the company's international operations. The decision to establish the subsidiary in China rather than Japan probably stems from China's comparatively lower wages and rent costs, as well as the country's large manufacturing infrastructure, which offers cost advantages and a stable environment to support manufacturing and export activities.

Financial Strategies to Manage Exchange Rate Risks

If the Chinese subsidiary needs to borrow funds to finance expansion and wishes to reduce its exposure to exchange rate risk, it should consider borrowing in the currency in which its revenues and costs are denominated, or in a currency that serves as a hedge. Since the majority of its expenses are paid in Chinese yuan, and revenues are generated in yen, borrowing in U.S. dollars might expose it to exchange rate fluctuations, especially if the yuan is undervalued. Borrowing in Chinese yuan could reduce direct exposure but might involve higher interest costs if the currency is undervalued intentionally by China. Alternatively, borrowing in Japanese yen could be advantageous because yen-denominated debt would align with the revenue currency from sales, helping to mitigate currency risk. Given the context, the most effective strategy may involve issuing debt in yen if the subsidiary’s revenue stream in Japan dominates profit generation, or using currency hedging instruments to offset exposure.

China’s policy of maintaining an undervalued yuan has been a deliberate strategy to promote exports by making Chinese goods more competitively priced internationally. This has led to debates over whether the United States should attempt to weaken the dollar intentionally to achieve a similar effect. Advocates argue that a weaker dollar could help U.S. exports by increasing the competitiveness of American goods globally, potentially supporting domestic manufacturing and employment. However, opponents warn that artificially weakening the dollar could lead to inflation, reduce purchasing power, and create global economic instability by disrupting exchange rate equilibria. Such a policy could also provoke retaliatory actions from trading partners, leading to a trade war or currency conflicts. Overall, while adjusting currency values through monetary policy can influence trade balances, deliberately devaluing the dollar carries substantial risks and could undermine economic stability both domestically and internationally. Therefore, rather than attempting to weaken the dollar intentionally, focus should be placed on structural reforms to enhance productivity and competitiveness in the long term.

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