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27. Exposure of MNCs to Exchange Rate Movements. Arlington Co.

expects to receive 10
million
euros in each of the next 10 years. It will need to obtain 2 million Mexican pesos in each of
the next 10 years. The euro is presently valued at $1.38 and is expected to depreciate by 2
percent each year. The peso is valued at $.13 and is expected to depreciate by 2 percent each
year. Review the valuation equation for an MNC. Do you think that the exchange rate
movements will have a favorable or unfavorable effect on the MNC?
ANSWER: The movements in the euro are expected to have an unfavorable effect on
Arlingtons value. The expected movements in the peso are expected to have a favorable
effect on Arlingtons value. However, the expected peso effect should be smaller because the
dollar amount of business in pesos is smaller. Thus, the overall effect should be unfavorable.