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

Kriner Co. has a higher exposure to exchange rate risk as it has the same exposure as Jacko Co. but with Sunland francs representing cash outflows. With the highly negatively correlated movements of the currencies against the dollar, Kriner Co. would face losses when the Sunland franc strengthens against the dollar during cash outflows.

Jacko Co Is a U