As a financial manager for a large multinational corporation (MNC), you have bee

Question

As a financial manager for a large multinational corporation (MNC), you have been asked to assess the firm's economic exposure. The two major currencies, other than the U.S. dollar, that affect the company are the Mexican peso (MP) and the British Pound (£). You have been given the projected future cash flows for the next year:

The current expected exchange rate in U.S. dollars with respect to the two currencies is as follows:

Create an excel spreadsheet to do the following:

a. Determine the net cash flows for both the Mexican peso and the British pound.

b. Determine the net cash flows as measured in U.S. dollars. It will represent the value of the economic exposure.

c. If the movements in Mexican Peso and the British Pound are highly correlated, how will this affect the company's degree of economic exposure?

Currency Total Inflow Total Outflow British Pounds £17,000,000 £11,000,000 Mexican Pesos MP 100,000 MP 25,000,000

Explanation / Answer

a) Currency Total Inflow Total Outflow Net cash flow Inflow - outflow British Pound 17000000 11000000 6000000 Mexican pesos 100000 25000000 -24900000 b) Currency Net cash flow Exchange rate Net cash flow dollar in dollars British Pound 6000000 1.66 9960000 Mexican pesos -24900000 0.1 -2490000 c) If the movement in Mexican Peso and the British Pound are highly correlated then the increase in exchange rate in British Pound will increase the exchange rate of mexican pesos. Hence the company will have a high degree of economic exposure

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