Question

Recent outbreaks of respiratory infection-based pandemic diseases such as COVID19 and H1N1 have boosted the demand for N95 respirators among frontline healthcare workers. 3M Co. (a U.S. firm world’s largest manufacturers for surgical masks) has an arrangement with a Chinese company in which it purchases products from them every week at the prevailing spot rate, and then sells the products in the United States invoiced in dollars. All of its competition is from U.S. firms that have no international business. The prices charged by 3M and its competitors will not change over the next year. Will the net cash flows generated by 3M increase, decrease, or be unaffected if the Chinese Yuan depreciates over the next year? Explain Please.

Answer 1

Since 3M is purchasing the the products in dollars from Chinese company,when the prices of Yuan will be depreciating against Dollars, 3M would be a gainer in such situation.

When the prices of Yuan will depreciate against Dollar, it will mean that the prices of Dollar will appreciate against yuan, so the is the payment of the company is made in the dollars, the depreciation is yuan means that the lesser amount of dollars is to be paid to the Chinese company, and hence it will lead to lesser cost of capital and it will help in increasing the overall profits of the company.