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

Since the SF net inflows exceed the DK net outflows, a weakening of the dollar would increase the dollar value of Magent Co.'s SF position more than it would decrease the dollar value of its DK position. Therefore, Magent Co. would benefit from a weaker dollar in this scenario.

Magent Co Is a U