Question

Fischer Inc., exports products from
Florida to Europe. It obtains supplies and
borrows funds locally. How would
appreciation of the euro likely affect its net
cash flows? Why?​

Answer 1

The net cash or capital flow of the US exporter will decrease in this case due to an appreciation of Euro.

Explanation:

• An appreciation of Euro relative to other international or foreign currencies,indicate the currency value of Euro increased compared to other foreign currencies and the monetary value of goods and services in European Union(EU) countries has become more expensive in terms of the foreign or international currencies.
• Alternatively,the goods and services in foreign or international countries have becomes consequently cheaper for citizens of EU countries due to appreciation of Euro relative to foreign currencies.
• In this case,Fischer Inc. is an US based exporter selling products to EU countries.Now,following the appreciation of Euro,the US export product has become cheaper for EU countries and they have to pay relatively less to the US exporter compared to before.This will essentially reduce the capital inflow for the US as a whole or the US exporter.
• As the cash or capital inflow is reduced for the US exporter,the net cash or capital flow which is calculated as the difference between the net cash/capital inflow and the net cash/capital outflow,is also consequently reduced,holding everything else constant.Therefore,the net cash or capital flow for US exporter will decrease due to an appreciation of Euro in this case.