The danger that an unexpected change in the exchange rate between the dollar and the currency in which a project's cash flows are denominated can increase the market value of that project's cash flow.

Question

Quizplus · Accepted Answer

An unexpected change in the exchange rate between the dollar and the currency in which a project's cash flows are denominated can actually decrease the market value of that project's cash flow. This is because if the local currency weakens against the dollar, the dollar-denominated cash flows will decrease. On the other hand, if the local currency strengthens against the dollar, the dollar-denominated cash flows will increase. Therefore, unexpected changes in exchange rates can create risk and uncertainty for projects with cash flows denominated in foreign currencies.

The Danger That an Unexpected Change in the Exchange Rate