a) Compare and contrast transaction exposure and economic exposure. Why would an MNC consider examining only...

a) Compare and contrast transaction exposure and economic exposure. Why would an MNC consider examining only its “net” cash flows in each currency when assessing its transaction exposure?

b) Your employer, a large MNC, has asked you to assess its transaction exposure. Its projected cash flows are as follows for the next year. Danish krone inflows equal DK50,000,000 while outflows equal DK40,000,000. British pound inflows equal £2,000,000 while outflows equal £1,000,000. The spot rate of the krone is $.15, while the spot rate of the pound is $1.50. Assume that the movements in the Danish krone and the British pound are highly correlated. Provide your assessment as to your firm’s degree of transaction exposure (as to whether the exposure is high or low). Substantiate your answer.

Expert Solution

Solution:-

A. Transaction exposures is a exposures which is due to only international transactions by a firm and Economic exposure is a exposure which includes any form of transactions which affects firms cash flows.

Foreign competition increases due to currency fluctuations. This affects the firm cash flow but not affect the ongoing transactions. It represents a form of economic exposure but not transaction exposure.

Consideration of all cash flows in a particular currency is not necesary, only net cash flows are necesary.

B.

Both Danish Krone and British Pound shows positive cash Inflows. Their exposure should be magnified if their exchange rates against dollar are seems to be continue be highly correlated.

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jeff jeffy answered 1 year ago

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