Question

Describe in general terms how future appreciation of the euro will likely affect the value (from the parent’s perspective) of a project established in Germany today by a U.S.-based MNC. Will the sensitivity of the project value be affected by the percentage of earnings remitted to the parent each year?

Answer 1

If the Euro appreciates, then it will result in translation gain for the US company. At the end of financial year, parent companies need to convert the foreign currency revenues in base currency. So when the conversion will happen, the revenue will be more as the subsidiary currency has appreciated which will result in more US dollars for the parent company.

The extra profit will be due to foreign currency translation, so it will not affect the sensitivity of the project value. The gain is not due to some internal efficiency that was achieved. So this gain may not be in future years, if the currency depreciates.