Answers_to_Assignment_4

Answers_to_Assignment_4 - Answers to Assignment# 4 Chapter...

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Answers to Assignment# 4 Chapter 10 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 Rate in U.S. Dollars Danish krone (DK) DK50,000,000 DK40,000,000 $.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. 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 of Exposure Danish krone (DK) +DK10,000,000 $.15 $1,500,000 British pound (£) +£1,000,000 $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. Thus, their exposure should be magnified if their exchange rates against the U.S. dollar continue to be highly correlated. 10. Translation Exposure. Consider a period in which the U.S. dollar weakens against the euro. How will this affect the reported earnings of a U.S.based MNC with European subsidiaries? Consider a period in which the U.S. dollar strengthens against most foreign currencies. How will this affect the reported earnings of a U.S.-based MNC with subsidiaries all over the world? ANSWER: The consolidated earnings will be increased due to the strength of the subsidiaries’ local currency (the euro). The consolidated earnings will be reduced due to the weakness of the subsidiaries’ local currencies. 15. PPP and Economic Exposure.
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Answers_to_Assignment_4 - Answers to Assignment# 4 Chapter...

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