xvii) a) 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 marks) b) Your employer, a large MNC, has asked you to assess its transaction exposure. Its projected cash flows are as follows for the next year. Danish krone inflows equal DK50, 000,000 while outflows equal DK40, 000,000. British pound inflows equal 2,000,000 while outflows equal 5,000,000. The spot rate of the krone is $.15, while the spot rate of the pound is $1.50. Estimate your companys transactions exposure. It is forecasted that USD will depreciate over the next 1 year against the major currencies around the world, what do you think will be the impact of the companys currency position on its value? Explain your answer. (3 marks) xviii) a) Explain the concept of interest rate parity. Provide the rationale for its possible existence. (2 marks) b) Assume that the existing U.S. one-year interest rate is 10 percent and the Canadian one-year interest rate is 11 percent. Also assume that interest rate parity exists. Should the forward rate of the Canadian dollar exhibit a discount or a premium? If U.S. investors attempt covered interest arbitrage, what will be their return? If Canadian investors attempt covered interest arbitrage, what will be their return? (3 marks)