The following information is to be used in answering questions 36?38.
U.S. borrowing rate for 1 year = 9.5%
U.S. deposit rate for 1 year = 8.7%
French borrowing rate for 1 year = 11.3%
French deposit rate for 1 year = 10.2%
French franc spot quote = $0.1763?78
French franc 1?year forward quote = $0.1729?47
-1990, Goodyear had operations in both Germany and the Netherlands. In the past the Dutch guilder and Deutsche mark were highly correlated in their movements against the U.S. dollar. If the Dutch unit has net inflows of guilders and the German unit has net inflows of DM, then Goodyear's combined transaction exposure
A) approximately equals the sum of its guilder and DM exposures
B) is less than the sum of its guilder and DM exposures because the currencies are highly correlated
C) is less than the sum of its guilder and DM exposures because of diversification between the company's subsidiaries
D) is not significant due to the highly correlated nature of the two currencies

Question

Quizplus · Accepted Answer

The correct answer is A because the net inflows of guilders and DM will increase the value of both currencies against the U.S. dollar, resulting in a combined transaction exposure that is approximately equal to the sum of the guilder and DM exposures.

The Following Information Is to Be Used in Answering Questions