Question

The following regression model was estimated by an Australian-based MNC to determine its degree of economic exposure to the U.S. dollar (US$) and the South African Rand (SAR):

where the dependent variable is the percentage change in cash flows (PCF) measured in the company's home currency over period t. The explanatory variable (et) is the percentage change in the exchange rate of the foreign currency (e.g., A$/SAR) over period t. The regression was estimated over a single period for each of the two currencies, with the following results:

	Regression Coefficient (a1)
US$	0.10
SAR	-0.76

Based on these results, which of the following statements is not true?

	A.	The MNC was more sensitive to movements in the SAR than in the US$.
	B.	On average, when the US$ appreciated, the MNC’s cashflows increased.
	C.	The MNC likely imports more goods from South Africa than it exports.
	D.	On average, when the SAR depreciated, the MNC’s cashflows decreased.
	E.	All of the above are true.

Answer 1

Regression model helpd to understand the liner relationship between two variable

The formula is Y i.e. Percentage change in cash flow = a + bx

where a= % change in rate of foreign currency

a is the intercept and b is the slope of the line (regression coefficient)

The sign of the regression co-efficient helps to identify the co-relation between indepenent and dependent variables.

A positive co-efficient indicates that as the value of the independent variable increases the mean of dependent variable also increase whereas a negative co-efficient indicates that as the independent variable increases the dependent variable tends to decrease

Here we have a positive co-efficient with US $ = 0.10 and negative co-efficient with SAR = -0.76

Hence,

There is an inverse relationship with SAR, and so the company will be more sensitive towards SAR than with US $ as with every increase in SAR there will be decrease in Percentage cash flows of the Australian company and vice-versa

so the statement D i.e.on average when SAR depreciated the MNC's cash flow decreased is an incorrect statement as MNC's cash flows would increase upon decrease of SAR due to negative co-efficient