Diz ltd is a UK-based MNC with net cash inflows of euros and net cash inflows of Swiss francs. These two currencies are highly correlated in their movements against the dollar. Yanta ltd is a UK-based MNC that has the same level of net cash flows in these currencies as Diz ltd except that its euros represent net cash outflows. Which firm has a higher exposure to exchange rate risk?

Question

Quizplus · Accepted Answer

Diz ltd has higher exposure to exchange rate risk because both its euro and Swiss franc cash flows are inflows, and since these currencies are highly correlated, any adverse movement against the dollar will affect both cash flows negatively. Yanta ltd, on the other hand, has euro outflows, which can offset the risk from Swiss franc inflows due to the correlation, reducing its overall exposure.

Diz Ltd Is a UK-Based MNC with Net Cash Inflows