Question

FrenchCo, a French company, is a worldwide leader in widget production. The US is FrenchCo's single largest market.

Assumptions:

1. FrenchCo's production capacity is located in France, and all of its cost are incurred in euro.

2. Additions to capacity required a lead time of more than one year.   

3. FrenchCo borrows only in euro.

A. Describe the effect of a short-term appreciation of the Euro vs the U.S. dollar on the profitability of FrenchCo's sales in the U.S. Need a detailed explaination for this?

Answer 1

Appreciation in the price of the Euro will decrease the profit earned by the French co.

For example, we assume that the current rate of exchange between the two nation US and France is 1 Euro = 1 Dollar. And the price of the widget is $10. In that case, the price of the widget will be same in both the country.

NOw, after appreciation in the price of the Euro the new exchange rate is 0.5 Euro = $1. In that case, the price of the price of the widget is just doubled in the US. The same widget will cost 2 euro in the US now. At a higher price, people will demand less and the sale of the Widget will drop.

This will reduce the amount of profit the French Co. is earning from the US market.