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Managing Currency Risk for General Gadget's coconut scrapers

General Gadget Corp. (GGC) is a U.S.-based multinational firm that makes electrical coconut scrapers. These gadgets are made only in the United States using local inputs. The scrapers are sold mainly to Asian and West Indian countries where coconuts are grown.

a. If GGC sells scrapers in Trinidad, what is the currency risk faced by the firm?

b. In what currency should GGC borrow funds to pay for its investment in order to mitigate its foreign exchange exposure?

c. Suppose that GGC begins manufacturing its products in Trinidad using local (Trinidadian) inputs and labor. How does this affect its exchange rate risk?

Solution Preview

a. If GGC sells scrapers in Trinidad, what is the currency risk faced by the firm?

As GGC will receive payment in local currency of Trinidad, which is Trinidad and Tobago dollar, it faces risk related to strengthening of US dollar against the Trinidad's currency, which will reduce the amount of money received by the company in US dollars. This can happen as there is a significant time gap ...

Solution Summary

General Gadget Corp. (GGC) is a U.S.-based multinational firm that makes electrical coconut scrapers. These gadgets are made only in the United States using local inputs. The scrapers are sold mainly to Asian and West Indian countries where coconuts are grown.

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