Exchange rate regimes by governments of the foreign countrie

Reference no: EM13224413

Like many MNC, Nike is subject to the change in exchange rate regimes by governments of the foreign countries. Nike has some cash flows between Western European countries, some of which have agreed to participate in the single European currency (the euro). The cash flows between Nike's subsidiaries in these countries are no longer subject to exchange rate movements since each country is using the same currency. Nike should also benefit because it can avoid transactions costs associated with exchanging one currency for another. However, there is still exchange rate risk whenever these subsidiaries conduct business outside those countries that participate in Europe. In addition, there is still exchange rate risk when these subsidiaries remit funds to the U.S. parent. During the Asian crisis, the government of Indonesia searched for ways to create a fixed or pegged exchange rate system to encourage investors to keep their investments in these countries. Yet, there was not much confidence that Indonesia would be able to enforce a pegged exchange rate between its currency (the rupiah) and the dollar. The governments also intervened in the foreign exchange market to limit the potential degree of depreciation. The high degree of volatility of the rupiah's value not only affected the cash flows of committed transactions but also affected the future orders of Nike's products in these countries. Some potential purchasers of athletic shoes reduced their orders because of the uncertainty about the price they would pay. Questions: If the value of the Indonesian rupiah was temporarily pegged to the U.S. dollar, how would this affect the cash flows of Nike? Would any future remittances of earnings from Nike's Indonesian subsidiary to the U.S. parent be free from exchange rate risk? Explain.

Reference no: EM13224413

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