part b Magent Co. is a U.S. company that has exposure to the Swiss francs (SF) a

ID: 2763079 • Letter: P

Question

part b Magent Co. is a U.S. company that has exposure to the Swiss francs (SF) and Danish kroner (DK). It has net outflows of SF450 million and net inflows of DK920 million next month. The present exchange rate of the SF is about $1.09 while the present exchange rate of the DK is $0.14. Magent Co. has not hedged these positions. What is the net inflow or outflow for Magent Company as measured in US dollars? The SF and DK are highly correlated in their movements against the dollar. If the US dollar strengthens by 10% (foreign currency weakens by 10%), explain whether Magent Co. will benefit from the exchange rate movement or be adversely affected by the exchange rate movement?

Explanation / Answer

Answer

Answer a

In millions

Currency

Exposure (foreign Currency)

Exchange rate ($)

Amount in $

A*B

Swiss Francs (SF)

-450

1.09

-490.5

Danish Kroner (DK)

920

0.14

128.8

Net outflow

-361.7

Answer b :

The Magent Co. has Net outflow of $ 361.7 millions. The SF and DK are highly correlated in their movements against dollar. If the US dollar strengthens by 10% (foreign currency weakens by 10%), So The Magent Co. will benefit if dollar strengthens against SF & DK as it will reduce net outflows in dollar terms. & The Magent Co. will be adversely affected if Dollar weakens against SF & DK as it will increase net outflows in dollar terms.