Question

13. Maura Watts Co. is a U.S. manufacturing firm that produces goods in the U.S. and sells all products to retail stores in the U.K.; the goods are denominated in pounds. It finances a small portion of its business with pound?denominated loans from British banks. Which of the following is true? (Assume that the amount of products to be sold is guaranteed by contracts.)

      A) The dollar value of sales is higher if the pound depre­ciates against the dollar.

      B) The dollar value of sales is unaffected by the pound’s exchange rate.

      C) Both of these are true.

      D) Neither of these is true.

Answer 1

Neither of the statements are true.

When pound depreciates against the dollar say from 1.4dollar/pound to 1.3dollar/pound, the underlying sales invoice being for 1000 pound wil mean that the dollar value of sales would be 1300 dollar instead of 1400 as earlier. Hence A is incorrect.

The dollar value of sales would change as the company has not hedged its foreign currency exposure. The company has a contract for the total number of goods it will sell. Hence it will be affected by the exchange fluctuation. Therefore B is incorrect.

Hence, D is the answer.