Question Details

Transaction versus Economic Exposure 


1. Transaction versus Economic Exposure. Compare and contrast transaction exposure and
economic exposure. Why would an MNC consider examining only its “net” cash flows in each
currency when assessing its transaction exposure?

2. Assessing Transaction Exposure. 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 $.15
British pound (£) £2,000,000 £1,000,000 $1.50
Assume that the movements in the Danish krone and the pound are highly correlated. Provide your
assessment as to your firm- degree of transaction exposure (as to whether the exposure is high or
low). Substantiate your answer.



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