If the net inflow of one currency is about the same amount as a net outflow in another currency, the firm will benefit if these two currencies are negatively correlated because the transaction exposure is offset.

Question

Quizplus · Accepted Answer

Transaction exposure is not offset by the correlation between currencies but by the netting of inflows and outflows in the same currency. Negative correlation between currencies does not inherently reduce transaction exposure; it affects the unpredictability of cash flows when converting between currencies.

If the Net Inflow of One Currency Is About the Same