Question Details

Has economic exposure changed 



1. Transaction Exposure. Vegas Corp. is a U.S. firm that exports most of its products to Canada. It
historically invoiced its products in Canadian dollars to accommodate the importers. However, it
was adversely affected when the Canadian dollar weakened against the U.S. dollar. Since Vegas
did not hedge, its Canadian dollar receivables were converted into a relatively small amount of
U.S. dollars. After a few more years of continual concern about possible exchange rate
movements, Vegas called its customers and requested that they pay for future orders with U.S.
dollars instead of Canadian dollars. At this time, the Canadian dollar was valued at $.81. The
customers decided to oblige, since the number of Canadian dollars to be converted into U.S.
dollars when importing the goods from Vegas was still slightly smaller than the number of
Canadian dollars that would be needed to buy the product from a Canadian manufacturer. Based
on this situation, has transaction exposure changed for Vegas Corp.? Has economic exposure changed ? Explain.
2. Measuring Economic Exposure. Using the following cost and revenue information shown for
DeKalb, Inc., determine how the costs, revenue, and cash flow would be affected by three possible
exchange rate scenarios for the New Zealand dollar (NZ$): (1) NZ$ = $.50, (2) NZ$ = $.55, and
(3) NZ$ = $.60. (Assume U.S. sales will be unaffected by the exchange rate.) Assume that NZ$
earnings will be remitted to the U.S. parent at the end of the period. Ignore possible tax effects.
Forecasted Net Cash Flows: DeKalb Inc.
(in millions of U.S. dollars and New Zealand dollars)
New Zealand
U.S. Business Business
Sales $800 NZ$800
Cost of Materials 500 100
Operating Expenses 300 0
Interest Expense 100 0
Cash Flow -$100 NZ$700



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