$1.$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

Swiss franc $($CHF$)$

CHF$8,000,000$

CHF$4,000,000$

$$\mathrm{.}85$

British pound $()$

$4,000,000$

$2,000,000$

$$1\mathrm{.}50$

$2.$ Assume that the movements in the Swiss franc and the pound are highly negatively correlated. Provide your assessment as to your firm$$s degree of transaction exposure $($as to whether the exposure is high or low$).$

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?

$3.$ Horizon Co$.$ has net receivables in several currencies that are highly correlated with each other. What does this imply about the firm$$s overall degree of transaction exposure? Are currency correlations perfectly stable over time? What does your answer imply about Horizon Co$.$ or any other firm using past data on correlations as an indicator for the future?

$4.$Why are the cash flows of a purely domestic firm exposed to exchange rate fluctuations?

$5.$ Laney Co$.$ produces hospital equipment. Most of its revenues are in the United States. About half of its expenses require outflows in Mexican pesos $($to pay for Mexican materials$).$ Most of Laney$$s competition is from U$.$S$.$ firms that have no international business at all. How will Laney Co$.$ be affected if the peso strengthens?

$6.$ Brown, Inc., exports chairs to Europe $($invoiced in U$.$S$.$ dollars$)$ and competes against local European companies. If purchasing power parity exists, why would Brown not benefit from a stronger euro?

$7.$ Boston Co$.($a U$.$S$.$ firm$)$ attempts to determine its economic

exposure to movements in the Swiss franc, by applying regression analysis to data over the last $36$ quarters:

SP $=$ b$0+$ b$1$e $+$ u

where SP represents the percentage change in Boston$$s stock price per quarter, e represents the percentage change in the france exchange rate per quarter, and u is an error term. Based on the analysis, the b$0$ coefficient is zero and the b$1$ coefficient is $-\mathrm{.}4$ and is statistically significant. Assume that interest rate parity exists. Today, the spot rate of the franc is $$\mathrm{.}80,$ the $90-$day Swiss interest rate is $1\%,$ and the $90-$day U$.$S$.$ interest rate is $2\%.$ Assume that the $90-$day forward rate is expected to be an accurate forecast of the future spot rate. Would you expect that Boston$$s value will be favorably affected, unfavorably affected, or not affected by its economic exposure over the next quarter? Explain.