2. (a) Your employer, a large MNC, has asked you to assess its transaction exposure. Its...

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2. (a) 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 Danish krone (DK) British pound () Total Inflow DK70,000,000 3,000,000 Total Outflow DK50,000,000 Current Exchange Rate in U.S. Dollars $0.26 2,000,000 $1.68 Assume that the movements in the Danish krone and the pound are highly correlated. Provide your assessment as to your firm's degree of transaction exposure (as to whether the exposure is high or low). Substantiate your answer (5 points). (b) Using the following cost and revenue information shown for DeKalb, Inc., determine how the costs, revenue, and cash flow would be affected by three possible exchange rate scenarios for the New Zealand dollar (NZ$): (1) NZ$ = $0.70, (2) NZ$ = $0.75, and (3) NZ$ = $0.80. (Assume U.S. sales will be unaffected by the exchange rate.) Assume that NZ$ earnings will be remitted to the U.S. parent at the end of the period. Ignore possible tax effects (20 points). Forecasted Net Cash Flows: DeKalb Inc. (in millions of U.S. dollars and New Zealand dollars) New Zealand Sales Cost of Materials. Operating Expenses Interest Expense Cash Flow U.S.Business Business $1000 NZ$900 600 300 500 0 200 -$300 NZ$600 2. (a) 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 Danish krone (DK) British pound () Total Inflow DK70,000,000 3,000,000 Total Outflow DK50,000,000 Current Exchange Rate in U.S. Dollars $0.26 2,000,000 $1.68 Assume that the movements in the Danish krone and the pound are highly correlated. Provide your assessment as to your firm's degree of transaction exposure (as to whether the exposure is high or low). Substantiate your answer (5 points). (b) Using the following cost and revenue information shown for DeKalb, Inc., determine how the costs, revenue, and cash flow would be affected by three possible exchange rate scenarios for the New Zealand dollar (NZ$): (1) NZ$ = $0.70, (2) NZ$ = $0.75, and (3) NZ$ = $0.80. (Assume U.S. sales will be unaffected by the exchange rate.) Assume that NZ$ earnings will be remitted to the U.S. parent at the end of the period. Ignore possible tax effects (20 points). Forecasted Net Cash Flows: DeKalb Inc. (in millions of U.S. dollars and New Zealand dollars) New Zealand Sales Cost of Materials. Operating Expenses Interest Expense Cash Flow U.S.Business Business $1000 NZ$900 600 300 500 0 200 -$300 NZ$600