Question

1. 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	$.17/1DK
British pound (£)	£2,000,000	£1,000,000	$1.60/1£

     

      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 1

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Answer:

Foreign Currency	Net inflows in Foreign currency	Current exchange rate	Value of exposure
Danish Krone	+DK10,000,000	$.17	1,700,000
British pound	£1,000,000	$1.6	1,600,000

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