As a financial manager for a large multinational corporation (MNC), you have been asked to assess the firm's economic exposure. The two major currencies, other than the U.S. dollar, that affect the company are the Mexican peso (MP) and the British Pound (£). You have been given the projected future cash flows for the next year:
|
Currency
|
Total Inflow
|
Total Outflow
|
|
British Pounds
|
£17,000,000
|
£11,000,000
|
|
Mexican Pesos
|
MP 100,000
|
MP 25,000,000
|
The current expected exchange rate in U.S. dollars with respect to the two currencies is as follows:
|
Currency
|
Exchange Rate
|
|
British Pounds
|
$1.66 per pound
|
|
Mexican Pesos
|
$0.10 per peso
|
Create an excel spreadsheet to do the following:
a. Determine the net cash flows for both the Mexican peso and the British pound.
b. Determine the net cash flows as measured in U.S. dollars. It will represent the value of the economic exposure.
c. If the movements in Mexican Peso and the British Pound are highly correlated, how will this affect the company's degree of economic exposure?