Your employer, a large MNC, has asked you to assess its transaction exposure. It

Question

Your employer, a large MNC, has asked you to assess its transaction exposure. Its projected cash flows are as follows for the next year. Danish krone inflows equal DK50,000,000 while outflows equal DK40,000,000. British pound inflows equal 2,000,000 while outflows equal 1,000,000. The spot rate of the Krone is $.15, while the spot rate of the pound is $1.50. Assume that the movements in the Danish krone and British 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.

Explanation / Answer

Ans)The net exposure to each currency in U.S. dollars is derived below

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

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

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