A US based multinational corporation(MNC) currently has an investment portfolio

Question

A US based multinational corporation(MNC) currently has an investment portfolio that includes Japanese securities valued at 10,000,000 yen. the company also owes its Japanese suppliers 12,000,000 yen. Which of the following statements is most correct?

A. The MNC is not exposed to exchange rate risk because it holds both assets and liabilities denominated in yen.

B. The MNC will be exposed to exchange rate losses if the yen declines in value relative to the dollar.

C. The MNC will be exposed to exchange rate losses if the yen increase in value relative to the dollar.

D. The MNC can avoid exchange rate risk by paying its Japanese liabilities with dollars.

I think D is right , but not sure.

Explanation / Answer

The correct Answer is C :The MNC will be exposed to exchange rate losses if the yen increase in value relative to the dollar.

Example: Present rate is 1$ =122 yen . The company has a total debt of about 2,000,000 yen. Therefore in $ terms it will be $16,393.44. Now if Yen increases in value, that is yen appriciates and becomes 1$=115 Yen, the in $ terms, the laibiltity will be $17,391.03. Hence in $ terms, the firm will be exposes o losses if the yen increases in value to the dollar

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