Magent Co. is a U.S. company that has exposure to the Swiss francs (SF) and Danish kroner (DK). It has net inflows of SF200 million and net outflows of DK500 million. The present exchange rate of the SF is about $.40 while the present exchange rate of the DK is $.10. Magent Co. has not hedged these positions. The SF and DK are highly correlated in their movements against the dollar. If the dollar weakens, then Magent Co. will:
A) benefit, because the dollar value of its SF position exceeds the dollar value of its DK position.
B) benefit, because the dollar value of its DK position exceeds the dollar value of its SF position.
C) be adversely affected, because the dollar value of its SF position exceeds the dollar value of its DK position.
D) be adversely affected, because the dollar value of its DK position exceeds the dollar value of its SF position.

Question

Quizplus · Accepted Answer

Magent Co. will benefit because the dollar value of its net inflow in Swiss francs (SF200 million * $0.40 = $80 million) exceeds the dollar value of its net outflow in Danish kroner (DK500 million * $0.10 = $50 million). If the dollar weakens, the value of the SF inflow increases more than the DK outflow, resulting in a net gain.

Magent Co Is a U