The domestic currency value of a monetary cash flow denominated in a foreign currency changes _______ with a change in the value of the foreign currency.
A) disproportionately
B) the currency of denomination
C) not at all
D) one for one
E) None of the above

Question

Quizplus · Accepted Answer

The domestic currency value of a monetary cash flow denominated in a foreign currency changes one for one with a change in the value of the foreign currency. For example, if a US company has a cash flow of €100 and the exchange rate is $1.20 per €1, the cash flow is worth $120. If the exchange rate changes to $1.10 per €1, the cash flow is now worth $110 ($1.10 x €100). Therefore, the change in value of the foreign currency directly affects the domestic currency value of the cash flow.

The Domestic Currency Value of a Monetary Cash Flow Denominated