Jacko Co. is a U.S.-based MNC with net cash inflows of euros and net cash inflows of Sunland francs. These two currencies are highly negatively correlated in their movements against the dollar. Kriner Co. is a U.S.-based MNC that has the same exposure as Jacko Co. in these currencies, except that its Sunland francs represent cash outflows. Which firm has a high exposure to exchange rate risk?
A)Jacko Co.
B)Kriner Co.
C)The firms have about the same level of exposure.
D)Neither firm has any exposure.

Question

Quizplus · Accepted Answer

Both firms have exposure to exchange rate risk, but Kriner Co. has higher exposure because its cash outflows are denominated in Sunland francs, which are negatively correlated with the euro. This means that when the euro strengthens, Kriner Co. will have to pay more Sunland francs to meet its obligations, resulting in higher costs. Jacko Co. also has exposure to exchange rate risk, but its net cash inflows in euros and Sunland francs offset each other to some extent.

Jacko Co Is a U