If revenues and costs are equally sensitive to exchange rate movements, MNCs may reduce their economic exposure by restructuring their operations to shift the sources of costs or revenues to other locations so that:

Question

Quizplus · Accepted Answer

When cash inflows match cash outflows in each foreign currency, the MNCs are effectively balancing their cash flows and reducing their exposure to exchange rates. By shifting the sources of costs or revenues to other locations, they can ensure that their cash inflows and outflows are similar in each currency, reducing the impact of fluctuations in exchange rates. Option A and B are incorrect because having either cash inflows or outflows exceeding the other leads to an imbalance, which may actually increase economic exposure. Option D is incorrect because none of the options are applicable.

If Revenues and Costs Are Equally Sensitive to Exchange Rate