chapter 10 (FIN 6605)

chapter 10 (FIN 6605) - Chapter 10 1 Running Head: CHAPTER...

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Chapter 10 1 Running Head: CHAPTER 10 Chapter 10 Anastasia Cholacu FIN6605 International Financial Management Hodges University Dr. Kest March 2, 2011 Chapter 10 Answers
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2 1. Transaction versus Economic Exposure. 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? ANSWER: Transaction exposure is due only to international transactions by a firm. Economic exposure includes any form by which the firm’s cash flow will be affected. Foreign competition may increase due to currency fluctuations. This could affect the firm’s cash flow, but did not affect the value of any ongoing transactions. Thus, it represents a form of economic exposure but not transaction exposure. Transaction exposure is a subset of economic exposure. Consideration of all cash flows in a particular currency is not necessary when some inflows and outflows offset each other. Only net cash flows are necessary. 2. Assessing Transaction Exposure. Your employer, a large MNC, has asked you to assess its transaction exposure. Its projected cash flows are as follows for the next year: Currency Total Inflow Total Outflow Current Exchange (U.S. $) Danish Krone (DK) DK 50,000,000 DK 40,000,000 $.15 British Pound (£) £ 2,000,000 £ 1,000,000 $1.50 Assume that the movements in the Danish Krone and the 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.
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3 ANSWER: The net exposure to each currency in U.S. dollars is derived below: Foreign Currency Net Inflows in Foreign Currency Current Exchange Rate Value to Exposure Danish Krone (DK) +DK 10,000,000 $.15 $1,500,000 British Pound (£) +£ 2,000,000 $1.50 $1,500,000 The Krone and Pound values move in tandem against the dollar. Both the Krone and the Pound exposure show positive net inflows. Therefore, their exposure should be magnified if their exchange rates against the U.S. dollar continue to be highly correlated. 3. Factors That Affect a Firm’s Transaction Exposure. What factors affect a firm’s degree of transaction exposure in a particular currency? For each factor, explain the desirable characteristics that would reduce transaction exposure. ANSWER: - Currency variability—low level is desirable. -
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chapter 10 (FIN 6605) - Chapter 10 1 Running Head: CHAPTER...

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