Raton is a U.S. Company that has net inflows of 100 million Swiss francs and net
ID: 2742968 • Letter: R
Question
Raton is a U.S. Company that has net inflows of 100 million Swiss francs and net outflows of 100 million British pounds. The present exchange rate of the Swiss franc is about $0.90/1Swiss franc while the present exchange rate of the pound is $1.70. Raton has not hedged these positions. The Swiss franc and British pound are highly correlated in their movements against the dollar. Explain whether Raton will be favorably or adversely affected if the dollar weakens against foreign currencies over time.
Explanation / Answer
Inflow in terms of $ = 100*0.9 = $90 million
Outflow in terms of $ = 100/1.7 = $58.82 million
If the dollar weakens
The net effect will however depend on the extent to which the dollar weakens w.r.t. each currency.
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