Suppose you are the Director of Finance at a multinational corporation (MNC) that’s headquartered in the U.S. The cost of capital for this MNC is 12.2%. You are examining this data that you received from the affiliates. The analyst in your department has prepared the tables below that show cash inflows and cash outflows in local currencies and exchange rates. Assume the data is for Quarter 4, 2004. Use this data to assess currency risk. 

Use Excel.

1. In Table 2, which currency do you think is contributing the most risk? Why? Explain. 2. In Table 2 and Table 3, what approaches would you use to estimate exchange rate risk? 3. Will the approach be different for Table 2 versus Table 3? Why? Explain. 4. Is it necessary to look at these risks at all? Why or why not? Explain.
 
 

Table 1: Net Cash Inflows and Outflows in Local Currency and US Dollars for 2004 Currency Total Inflow (Local Total Outflow Currency) Net Inflow/Outflow (Local Currency) Expected Exchange Rate Net Inflow/Outflow (US $) British Pounds () 17,000,000 7,000,000 10,000,000 1.5 15,000,000 Canadian Dollars (C$) Swedish Krona (SK) Mexican Peso (MP) 12,000,000 2,000,000 20,000,000 120,000,000 90,000,000 10,000,000 80,000,000 10,000,000 -100,000,000 0.15 0.1 0.8 8,000,000 -15,000,000 8,000,000 Table 2: Range of Net Cash Inflows and Outflows for Quarter 4, 2004 Currency Total Inflow (Local Currency) Expected Exchange Net Inflow/Outflow (US $) Rate British Pounds () 10,000,000 1.40 1.6 14,000,000 16,000,000 Canadian Dollars (C$) 10,000,000 0.79 0.81 7,900,000 8,100,000 Swedish Krona (SK) -100,000,000 0.14 0.16 -14,000,000 -16,000,000 Mexican Peso (MP) 80.000.000 0.06 0.11 4.800.000 8.800.000