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Assessing Transaction Exposure. Your employer, a large MNC, has asked you to assess its transaction exposure. Its projected cash flows are as follows...

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.

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