Miller Company has a subsidiary located in Saudi Arabia. In order to reduce economic exposure, Miller restructured its operations and increased supply order in Saudi Arabia. Furthermore, it has instructed its Saudi Arabian subsidiary to borrow more in Saudi Arabian riyal. As a result of this restructuring, the Saudi Arabian subsidiary currently has a zero cash flow. Which of the following statements is correct?

a. Miller has yirtually eliminated its economic exposure regarding the Saudi Arabian subsidiary.

b. The subsidiary should probably be abandoned since it does not generate any cash flows for Miller.

A

Explanation:

Sudden currency fluctuation on the company's cash flow and foreign investment leads to economic exposure.

In an attempt to reduce this effect, Miller directed most of his operation to the subsidiary in Saudi Arabia resulting in a zero cash flow.

This effect does not mean that the subsidiary should be abandoned but Miller has virtually eliminated its economic exposure in Saudi Arabia

Miller has virtually eliminated its economic exposure regarding the Saudi Arabian subsidiary.

Explanation:

Exposure is defined as the amount of money that is invested in a particular business venture that can be lost in case of unfavourable performance.

It is expressed in monetary terms or as a percentage of investment portfolio.

Miller has ensured economic exposure is reduced by borrowing heavily in Saudi riyal. This results in only a small amount being invested directly by Miller in the Saudi subsidiary.

The money generated is used to service the loan, resulting in zero cash flow to Miller.

In this scenario Muller has virtually eliminated its economic exposure regarding the Saudi Arabian subsidiary.