Question Details

Cash Flow Sensitivity to Exchange Rate 



1. Exposure of Net Cash Flows. Each of the following U.S. firms is expected to generate $40
million in net cash flows (after including the estimated cash flows from international sales if there
are any) over the next year. Ignore any tax effects. Each firm has the same level of expected
earnings. None of the firms have taken any positions in exchange rate derivatives to hedge their
exchange rate risk. All payments for the international trade by each firm will occur one year from
today.
Sunrise Co. has ordered imports from Austria, and its imports are invoiced in euros. The dollar
value of the payables (based on today- exchange rate) from its imports during this year is $10
million. It has no international sales.
Copans Co. has ordered imports from Mexico, and its imports are invoiced in U.S. dollars. The
dollar value of the payables from its imports during this year is $15 million. It has no international
sales.
Yamato Co. ordered imports from Italy, and its imports are invoiced in euros. The dollar value of
the payables (based on today- exchange rate) from its imports during this year is $12 million. In
addition, Yamato exports to Portugal and its exports are denominated in euros. The dollar value of
the receivables (based on today- exchange rate) from its exports during this year is $8 million.
Glades Co. ordered imports from Belgium, and these imports are invoiced in euros. The dollar
value of the payables (based on today- exchange rate) from its imports during this year is $7
million. Glades also ordered imports from Luxembourg and these imports are denominated in
dollars. The dollar value of these payables is $30 million. Glades has no international sales.
Based on this information, which firm is exposed to the most exchange rate risk? Explain.

2. Cash Flow Sensitivity to Exchange Rate Movements. The Central Bank of Poland is about to
engage in indirect intervention later today, in which it will lower Poland- interest rates
substantially. This will have an impact on the value of the Polish currency (zloty) against most
currencies because it will immediately affect capital flows. Missouri Co. has a subsidiary in
Poland that sells appliances. The demand for its appliances is not affected much by the local
economy. Most of its appliances produced in Poland are typically invoiced in zloty and are
purchased by consumers from Germany. The subsidiary- main competition is from appliance
producers in Portugal, Spain, and Italy that also export appliances to Germany.
a. Explain how the impact on the zloty- value will affect the sales of appliances by the Polish
subsidiary.
b. The subsidiary owes a British company 1 million British pounds for some technology that the
British company provided. Explain how the impact on the zloty- value will affect the cost of
this technology to the subsidiary.
c. The subsidiary plans to take 2 million zloty from its recent earnings, and will remit it to the
U.S. parent in the near future. Explain how the impact on the zloty- value will affect the
amount of dollar cash flows received by the U.S. parent due to this remittance of earnings by
the subsidiary.



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