Question

5. An MNC has the following net exposures to the euro and the British pound: a net inflow of 24million British pounds and a net outflow of 26.4 million euros. The spot current spot rates are $1.2500/£ and $1.1364/€. If the pound and euro are perfectly positively correlated in their movement against the U.S. dollar, will the company have high or low exposure to foreign exchange? Explain why either way.

Answer 1

Calculation of inflows and outflows in $

Inflows 24 millions pounds = 24*1.2500 = $ 30 millions

Outflow 26.40 millions EURO = 26.40*1.1364 = $30 millions

in the present question there is no inflows and outflow exposure.

the pound and euro are perfectly positively correlated in their movement against the U.S. dollar, it means, if Pound is depreciated Euro will also will be depreciated due to perfectly postive correlation between both the currency but Doller will be Appreciated.

Suppose Pound is depreciated by 5%. this results EURO will also be depreciated by 5% because of postively relation.but doller will be appreciated by 5%.the total effect of this transaction would results.cash outflow decrease by 5%,and also cash inflows will decrease by 5%.The net effect will be Nill.

Hence, we can say that the company have low exposure to foreign exchange