A U.S. MNC has the equivalent of $1 million cash outflows in each of two highly negatively correlated currencies. During ____ dollar cycles, cash outflows are ____.
A)weak; somewhat stable
B)weak; favorably affected
C)weak; adversely affected
D)none of the above

Question

Quizplus · Accepted Answer

When the dollar is weak, the value of foreign currencies relative to the dollar increases, making the cash outflows in those currencies more expensive in dollar terms. However, because the currencies are highly negatively correlated, when one currency strengthens (making the outflow more expensive), the other weakens (making the outflow less expensive), which tends to stabilize the overall cash outflow in dollar terms.

A US MNC Has the Equivalent of $1 Million Cash Outflows