Question

1. Raton is a U.S. Company that has net inflows of 80 million Swiss francs and net outflows of 60 million British pounds. The present direct exchange rate of the Swiss franc is $1.05/1Swiss franc while the present direct exchange rate of the pound is $1.31. Raton has not hedged these positions. The Swiss franc and British pound are highly correlated in their movements against the dollar. Explain whether Raton will be favorably or adversely affected if the dollar weakens against foreign currencies over time.

Answer 1

Since the United States company will be having inflows in Swiss franc then it will be affected in a positive manner when the dollar will be depreciated because it will mean that it will be getting more of the Swiss franc.

it also has a net outflows of British pounds so it will mean that when the dollar will be weakening it will mean, the United States company will have to pay more of the United States dollar because it has weakend in comparison of the British pounds.

United States company when it is acting as an exporter then it will be having receivables of foreign currencies and in this scenario it will want the domestic currency to depreciate because it will lead to more of the inflows.

When it will have foreign currency payables, it will always want the domestic currency to appreciate because it will have to pay lesser so decrease in the domestic currency will mean the payable amount will be increasing.