Exposure to Cash Flows
Response to the following problem:
Lance Co. is a U.S. company that has exposure to the Swiss franc (SF) and Danish krone (DK). It has net inflows of SF100 million and net outflows of DK500 million. The present exchange rate of the SF is about $.80 while the present exchange rate of the DK is $.10. Lance Co. has not hedged these positions. The SF and DK are highly correlated in their movements against the dollar. Explain whether Lance will be favorably or adversely affected if the dollar strengthens against foreign currencies over time.