The following regression model was run by a U.S.-based MNC to determine its degree of economic exposure as it relates to the Australian dollar and Sudanese dinar (SDD):
$$
P C F_{t}=a_{0}+a_{1} e_{t}+\mu_{t}
$$
where the term on the left-hand side is the percentage change in inflation-adjusted cash flows measured in the firm's home currency over period $ t $, and $ e_{t} $ is the percentage change in the exchange rate of the currency over period $ t $. The regression was run over two subperiods for each of the two currencies, with the following results:

Based on these results,which of the following statements is probably not true?
A) The MNC was more sensitive to movements in the Australian dollar than in the dinar in the earlier subperiod.
B) The MNC was more sensitive to movements in the dinar than in the Australian dollar in the more recent subperiod.
C) The MNC probably had more outflows than inflows in Australian dollars in the earlier subperiod.
D) The MNC probably had more inflows than outflows denominated in dinar in the more recent subperiod.
E) All of the above are true.

Question

The following regression model was run by a U.S.-based MNC to determine its degree of economic exposure as it relates to the Australian dollar and Sudanese dinar (SDD):
$$
P C F_{t}=a_{0}+a_{1} e_{t}+\mu_{t}
$$
where the term on the left-hand side is the percentage change in inflation-adjusted cash flows measured in the firm's home currency over period $ t $, and $ e_{t} $ is the percentage change in the exchange rate of the currency over period $ t $. The regression was run over two subperiods for each of the two currencies, with the following results:

Based on these results,which of the following statements is probably not true?
A) The MNC was more sensitive to movements in the Australian dollar than in the dinar in the earlier subperiod. 
B) The MNC was more sensitive to movements in the dinar than in the Australian dollar in the more recent subperiod. 
C) The MNC probably had more outflows than inflows in Australian dollars in the earlier subperiod. 
D) The MNC probably had more inflows than outflows denominated in dinar in the more recent subperiod. 
E) All of the above are true.

Quizplus · Accepted Answer

From the regression results, we can see that in the earlier subperiod for the Australian dollar, the coefficient estimate for the exchange rate variable is negative (-0.575). This means that the MNC had more inflows than outflows in Australian dollars, as a weaker Australian dollar (represented by a negative percentage change in the exchange rate) would lead to higher cash flows for the MNC (represented by a positive percentage change in the inflation-adjusted cash flows). Therefore, statement C is probably not true as it suggests the opposite. Statements A, B, and D are all supported by the regression results.

The Following Regression Model Was Run by a U PCFt=a0+a1et+μtP C F_{t}=a_{0}+a_{1} e_{t}+\mu_{t}PCFt​=a0​+a1​et​+μt​

The Following Regression Model Was Run by a U $P C F_{t}=a_{0}+a_{1} e_{t}+\mu_{t}$