Question

If an MNC has a net inflow in one currency and a net outflow of about the same amount in another currency, then the MNCs' transaction exposure is ____ if the two currencies are ____ correlated.

Answer 1

Answer:

Transaction exposure is High if the two currencies are Negatively correlated.

Explanation:

The reason is that when the two amounts are the same with positive correlation, then the benefit arising from the dollars is equal to losses in chinese Yen. And the net effect will be no profit and no loss arising due to the strengthening of the other.

This means if their is no correlation then the two currencies might move adversely at the same time and the example can be taken by analyzing that Ethiopia is largely independent of making sales to America so the possibility exists that the company will either increase its worth or decrease its worth by the currency movements.