1. Compare and contrast transaction exposure and economic exposure. Why would an MNC consider examining only its net cash flows in each currency when assessing its transaction exposure?
2. Horizon Co. has net receivables in several currencies that are highly correlated with each other. What does this imply about the firms overall degree of transaction exposure? Are currency correlations perfectly stable over time? What does your answer imply about Horizon Co. or any other firm using past data on correlations as an indicator for the future?
3. Why are the cash flows of a purely domestic firm exposed to exchange rate fluctuations?