Diz Co. is a U.S.-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 Co. is a U.S.-based MNC that has the same level of net cash flows in these currencies as Diz Co. except that its euros represent net cash outflows. Which firm has a higher exposure to exchange rate risk?
A) Diz Co.
B) Yanta Co.
C) the firms have about the same level of exposure.
D) neither firm has any exposure.

Question

Quizplus · Accepted Answer

Diz Co. has a higher exposure to exchange rate risk because it has net cash inflows in both euros and Swiss francs, which are highly correlated. This means that if the dollar strengthens against these currencies, Diz Co. will receive less in dollar terms, increasing its exchange rate risk. Yanta Co., on the other hand, has net cash outflows in euros, which can offset the risk from its Swiss franc inflows, reducing its overall exposure.

Diz Co Is a U