Magent Co. is a U.S. company that has exposure to the Swiss franc (SF) and Danish kroner (DK). It has net inflows of SF200 million and net outflows of DK500 million. The present exchange rate of the SF is about $.40 while the present exchange rate of the DK is $.10. Magent Co. has not hedged these positions. The SF and DK are highly correlated in their movements against the dollar. If the dollar weakens, then Magent Co. will:
A) benefit, because the dollar value of its SF position exceeds the dollar value of its DK position.
B) benefit, because the dollar value of its DK position exceeds the dollar value of its SF position.
C) be adversely affected, because the dollar value of its SF position exceeds the dollar value of its DK position.
D) be adversely affected, because the dollar value of its DK position exceeds the dollar value of its SF position.

Question

​Magent Co. is a U.S. company that has exposure to the Swiss franc (SF) and Danish kroner (DK). It has net inflows of SF200 million and net outflows of DK500 million. The present exchange rate of the SF is about $.40 while the present exchange rate of the DK is $.10. Magent Co. has not hedged these positions. The SF and DK are highly correlated in their movements against the dollar. If the dollar weakens, then Magent Co. will:
A) ​benefit, because the dollar value of its SF position exceeds the dollar value of its DK position.
B) ​benefit, because the dollar value of its DK position exceeds the dollar value of its SF position.
C) ​be adversely affected, because the dollar value of its SF position exceeds the dollar value of its DK position.
D) ​be adversely affected, because the dollar value of its DK position exceeds the dollar value of its SF position.

Quizplus · Accepted Answer

If the dollar weakens, the value of foreign currencies relative to the dollar increases. Magent Co. has a net inflow of SF200 million (worth $80 million) and a net outflow of DK500 million (worth $50 million). Since the SF position is larger in dollar terms, a weaker dollar benefits Magent Co. by increasing the value of its SF inflows more than the increase in the cost of its DK outflows.

​Magent Co

Magent Co