Assessing economic exposure. Alhambra plc plans to create and finance a subsidiary in Argentina that produces computer components at a low cost and exports them to other countries. It has no other international business. The subsidiary will produce computers and export them to Africa and will invoice the products in pounds. The values of the currencies in Africa are expected to remain very stable against the pound. The subsidiary will pay wages, rent, and other operating costs in Argentine pesos. The subsidiary will remit earnings monthly to the parent.
a. Would Alhambra's cash flows be favourably or unfavourably affected if the Argentine peso depreciates over time?
b. Assume that Alhambra considers partial financing of this subsidiary with peso loans from Argentine banks instead of providing all the financing with its own funds. Would this alternative form of financing increase, decrease, or have no effect on the degree to which Alhambra is exposed to exchange rate movements of the peso?