Answers to End of Chapter 10s Questions

1. Transaction exposure is due only to international transactions by a firm. Economic exposure includes any form by which the firms cash flow will be affected. Foreign competition may increase due to currency fluctuations. This could affect the firms cash flow, but did not affect the value of any ongoing transactions. Thus, it represents a form of economic exposure but not transaction exposure. Transaction exposure is a subset of economic exposure. Consideration of all cash flows in a particular currency is not necessary when some inflows and outflows offset each other. Only net cash flows are necessary. 2. The net exposure to each currency in .!. dollars is derived below" Foreign Currency 'anish (rone )'*+ 1ritish pound )2+ #et $nflows in Foreign Currency ,'*-.,...,... ,2-,...,... Current Exchange %ate /.-0 /-.0. &alue of Exposure /-,0..,... /-,0..,...

The (rone and pound values move in tandem against the dollar. 1oth the (rone and the pound exposure show positive net inflows. Thus, their exposure should be magnified if their exchange rates against the .!. dollar continue to be highly correlated. 4. $ts exposure is high since all currencies move in tandem 3 no offsetting effect is li(ely. $f one of these currencies depreciates substantially against the firms local currency, all others will as well, and this reduces the value of these net receivables. #o4 Thus, past correlations will not serve as perfect forecasts of future correlations. Firms can not presume that past correlations will be perfectly accurate forecasts of future correlations. 5et, historical data may still be useful if the general ran(ing of correlations is somewhat stable. 7. $f the firm competes with foreign firms that also sell in a given mar(et, the consumers may switch to foreign products if the local currency strengthens. 10. The consolidated earnings will be increased due to the strength of the subsidiaries local currency )the euro+. The consolidated earnings will be reduced due to the wea(ness of the subsidiaries local currencies.

!6'78.0" 9ultinational 1usiness Finance

14. $f !ooner Company hedged its imports, then it would have an advantage over the competition when the dollar wea(ened )since its competitors would pay higher prices for the luggage+, and could possibly gain mar(et share or would have a higher profit margin. $t would be at a disadvantage relative to the competition when the dollar strengthened and may lose mar(et share or be forced to accept a lower profit margin. :hen !ooner Company does not hedge, the amount paid for imports would depend on exchange rate movements, but this is also true for all of its competitors. Thus, !ooner is more li(ely to retain its existing mar(et share. 17. First, its receivables from its exports were converted to fewer dollars due to the depreciation of the ;sian currencies. !econd, any funds remitted by the 9alaysian subsidiary converted to fewer dollars for the parent. Third, the earnings generated by the 9alaysian subsidiary were translated to fewer dollars on the consolidated income statement )translation exposure+ even if it did not remit any earnings to the parent. 21. Transaction exposure is reduced since &egas will have less receivables in Canadian dollars. <owever, the economic exposure will not necessarily be reduced because a wea( Canadian dollar could cause a lower demand for its exports and will still affect cash flows. 29. $ts sales should increase because higher inflation in 9exico will cause the peso to wea(en against the dollar, and therefore wea(en against the real when real is pegged to /. !o peso wea(ens against real and 1ra=ilian customers buy more supplies from 9exico. 32. a. The lower interest rate in 6oland will reduce capital flows to 6oland, which reduces the demand for =loty, which wea(ens the value of the =loty. Thus, sales of appliances by the 6olish subsidiary to >ermany should increase because >erman consumers can purchase appliances from the subsidiary at a lower price. b. The lower interest rate in 6oland will reduce capital flows to 6oland, which reduces the demand for =loty, which wea(ens the value of the =loty. The subsidiarys cost will increase because it will ta(e more =loty to purchase technology. c. The earnings will convert to less dollars because of the =lotys depreciation against the dollar.

!6'78.0" 9ultinational 1usiness Finance