Exam 10: Measuring Exposure to Exchange Rate Fluctuations

The VAR method presumes that the distribution of exchange rate movements is normal.

Subsidiary A of Mega Corporation has net inflows in Australian dollars of A$1,000,000, while Subsidiary B has net outflows in Australian dollars of A$1,500,000. The expected exchange rate of the Australian dollar is $.55. What is the net inflow or outflow as measured in U.S. dollars?

Consider an MNC that is exposed to the Bulgarian lev (BGL) and the Romanian leu (ROL). 30% of the MNC's funds are lev and 70% are leu. The standard deviation of exchange movements is 10% for lev and 15% for leu. The correlation coefficient between movements in the value of the lev and the leu is .85. Based on this information, the standard deviation of this two-currency portfolio is approximately:

A firm produces goods for which substitute goods are produced in all countries. Depreciation of the firm's local currency should:

The VAR method assumes that the volatility (standard deviation) of exchange rate movements changes over time.

If exchange rate movements are less volatile in the past than in the future, the estimated maximum expected loss derived from the VAR method will be underestimated.

Transaction exposure reflects:

If an MNC expects cash inflows of equal amounts in two currencies, and the two currencies are ____ correlated, the MNC's transaction exposure is relatively ____.

Jacko Co. is a U.S.-based MNC with net cash inflows of euros and net cash inflows of Sunland francs. These two currencies are highly negatively correlated in their movements against the dollar. Kriner Co. is a U.S.-based MNC that has the same exposure as Jacko Co. in these currencies, except that its Sunland francs represent cash outflows. Which firm has a high exposure to exchange rate risk?

Since earnings can affect stock prices, many MNCs are concerned about translation exposure.

Assume that the British pound and Swiss franc are highly correlated. A U.S. firm anticipates the equivalent of $1 million cash outflows in francs and the equivalent of $1 million cash outflows in pounds. During a ____ cycle, the firm is ____ affected by its exposure.

Generally, MNCs with less foreign revenues than foreign costs will be ____ affected by a ____ foreign currency.

Purely domestic firms are never affected by economic exposure.

If a U.S. firm's cost of goods sold exposure is much greater than its sales exposure in Switzerland, there is a ____ overall impact of the Swiss franc's depreciation against the dollar on ____.

A set of currency cash inflows is more volatile if the correlations are low.

Lazer Co. is a U.S. firm that exports computers to Belgium invoiced in euros and to Italy invoiced in dollars. Additionally, Lazer Co. has a subsidiary in Korea that produces computers in South Korea and sells them there. Lazer also has competitors in different countries. Lazer Co. is subject to:

A firm's transaction exposure in any foreign currency is based solely on the size of its open position in that currency.

If the U.S. dollar appreciates, an MNC's:

Generally, MNCs with less foreign costs than foreign revenues will be ____ affected by a ____ foreign currency.

The degree to which a firm's present value of future cash flows can be influenced by exchange rate fluctuations is referred to as transaction exposure.