"As Nike considers expanding in Latin American markets, the relationships between nominal interest rates, inflation rates and exchange rates are very important. Some Latin American countries have very high interest rates, which reflect the expectation of high inflation rates (Fisher effect), and the high inflation rates could cause currencies of Latin American countries to weaken. The higher inflation may increase the amount of Nike’s profits when measured in local currency (assuming that revenues and costs increase by a similar percentage, the nominal profits should increase). Yet, it would also cause downward pressure (due to purchasing power parity) on the exchange rates of the Latin American currencies against the dollar, so that the funds will convert to fewer dollars over time. In fact the exchange rate effects could more than offset any favorable effect on profits earned by a Latin American subsidiary. ,,QUESTION: If Nike expands its business throughout Latin American countries, some of which have very high inflation rates, do you think Nike should hedge future remittances of funds from Latin American countries to the United States? Explain.
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