Exposure of Net Cash Flows
Solve the following problem:
Each of the following U.S. firms is expected to generate $40 million in net cash flows (after including the estimated cash flows from international sales if there are any) over the next year. Ignore any tax effects. Each firm has the same level of expected earnings. None of the firms has taken any position in exchange rate derivatives to hedge exchange rate risk. All payments for the international trade by each firm will occur 1 year from today. Sunrise Co. has ordered imports from Austria, and its imports are invoiced in euros. The dollar value of the payables (based on today's exchange rate) from its imports during this year is $10 million. It has no international sales. Copans Co. has ordered imports from Mexico, and its imports are invoiced in U.S. dollars. The dollar value of the payables from its imports during this year is $15 million. It has no international sales. Yamato Co. ordered imports from Italy, and its imports are invoiced in euros. The dollar value of the payables (based on today's exchange rate) from its imports during this year is $12 million. In addition, Yamato exports to Portugal, and its exports are denominated in euros. The dollar value of the receivables (based on today's exchange rate) from its exports during this year is $8 million. Glades Co. ordered imports from Belgium, and these imports are invoiced in euros. The dollar value of the payables (based on today's exchange rate) from its imports during this year is $7 million. Glades also ordered imports from Luxembourg, and these imports are denominated in dollars. The dollar value of these payables is $30 million. Glades has no international sales. Based on this information, which firm is exposed to the most exchange rate risk? Explain.