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.

Solutions

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.

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.

If you have any query related to question then feel free to ask me in a comment.Thanks.

jeff jeffy answered 1 year ago

Next > < Previous

Related Solutions

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

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?

Consider economic, transaction, and translation exposure. Which of these is easiest to mitigate and what would...

Consider economic, transaction, and translation exposure. Which of these is easiest to mitigate and what would be the most effective way of doing that? Is one a larger danger than the others? Which is most potentially devastating of the three? Why?

A MNC is subject to several different types of exposure: Translation, transaction, and economic. Which type...

A MNC is subject to several different types of exposure: Translation, transaction, and economic. Which type of exposure has the greatest impact on a MNC? Why? Which is the most difficult to manage? Why? Give a specific example in relation to Puerto Rico.

How would you rank the relative importance of transaction exposure, economic exposure, and translation exposure? Explain...

How would you rank the relative importance of transaction exposure, economic exposure, and translation exposure? Explain your answer. If you are the decision maker, will you hedge translation exposure? There are two approaches of hedging: 1) hedge only when we expect an unfavorable movement in foreign exchange rate, and 2) hedge anyway regardless of our expectation of exchange rate movements. Which approach would you use and why?

Question 1 a) How would you define transaction exposure? How is it different from economic exposure?...

Question 1 a) How would you define transaction exposure? How is it different from economic exposure? b) Should a firm hedge? Why or why not? c) Explain the basic differences between the operation of a currency forward market and a futures market. d) How would you define economic exposure to exchange risk?

Discuss the difference between transaction and economic exposure.

Briefly describe the following items: 1.Transaction exposure, economic exposure and translation exposure. Which exposure is more...

Briefly describe the following items: 1.Transaction exposure, economic exposure and translation exposure. Which exposure is more relevant to multinational corporation? Please explain 2.Purchasing power parity and Interest rate parity, and their linkage.

Distinguish between the following types of foreign exchange exposure: Transaction exposure Economic exposure Translation exposure Given...

Distinguish between the following types of foreign exchange exposure: Transaction exposure Economic exposure Translation exposure Given 1 example for each.

Which of the following is an example of economic exposure but not an example of transaction...

Which of the following is an example of economic exposure but not an example of transaction exposure? A decrease in the peso's value decreases a U.S. firm's dollar value of peso receivables An increase in the pound's value increases a U.S. firm's cost of British pound payables. An increase in the dollar's value impacts a U.S. firm's domestic sales because foreign competitors are able to increase their sales to U.S. customers. A decrease in the Swiss franc's value decreases the...

Compare and contrast economic and accounting profits. Explain why a firm in a perfectly competitive market would...

Compare and contrast economic and accounting profits. Explain why a firm in a perfectly competitive market would choose to remain in business, if its profit is zero at equilibrium. Illustrate any theories or concepts you decide to use to answer this question with numerical examples. b. Complete the table below by filling in YES, NO, or MAYBE for each type of market structure. Do Firms: Perfect Competition Monopoly Oligopoly Make differentiated products? NO MAYBE YES Have Excess capacity? NO MAYBE YES...

Subjects