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 because its cash outflows are in Sunland francs, which are negatively correlated with the euro. If the euro strengthens against the dollar, Jacko Co. will benefit from its net cash inflows of euros, which will partially offset any losses from its net cash inflows of Sunland francs. However, Kriner Co. will suffer losses from both its net cash outflows of Sunland francs and its exposure to the euro through its net cash inflows of euros. Therefore, Kriner Co. has a higher exposure to exchange rate risk than Jacko Co.

Jacko Co Is a U