Assessing Transaction Exposure. Your employer, Devil's Food, a large MNC based in the U.S., has asked you to assess its transaction exposure. Its projected cash flows are as follows for the next year:

Currency Total Inflow Total Outflow St (FC-USD)

Swedish krona (SEK) SEK 50,000,000 SEK 40,000,000 USD 0.16

British pound (GBP) GBP 1,000,000 GBP 2,000,000 USD 1.60

Calculate the Net Transaction Exposure (NTE).

i) Assume that the movements in the SEK and the GBP are highly correlated. Provide your assessment as to your firm's degree of transaction exposure (as to whether the exposure is high or low). Substantiate your answer.

ii) Suppose the correlation is equal to 1.0, i.e., perfect positive correlation. Suppose the GBP appreciates to 1.76 GBPUSD. What is the new NTE? What is the change in NTE?

iii) Suppose the correlation is equal to -1.0, i.e., perfect negative correlation. Suppose the GBP appreciates to 1.76 GBPUSD. What is the new NTE?