Chartered Financial Analyst Level 2 test

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CFA Level 2 - Financial Statement Analysis - Multinational Operations

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Global Manufacturing Inc., a US-based multinational company, has a subsidiary in China that purchases raw materials from local suppliers in Chinese Yuan (CNY). The subsidiary's financial statements are prepared in CNY and then translated into US dollars for consolidation. Recently, the company's treasury department has noticed that the subsidiary's cost of goods sold (COGS) has increased significantly when translated into US dollars, despite stable prices in CNY. This is primarily due to the depreciation of the US dollar against the CNY. Which of the following strategies would be most effective for Global Manufacturing Inc. to manage the foreign exchange risk associated with the Chinese subsidiary's CNY-denominated purchases?

Adjust the subsidiary's pricing strategy to reflect the changes in the exchange rate, passing on the increased COGS to customers and maintaining profit margins in US dollars.

Implement a forward contract to lock in the exchange rate for future CNY purchases, mitigating the impact of US dollar depreciation on the subsidiary's COGS.

Hedge the foreign exchange risk by borrowing in CNY and using the proceeds to finance the subsidiary's purchases, creating a natural hedge against currency fluctuations.