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FIN/711 v7

Signature Assignment: Estimating Global Risk in Global Decisions Analysis

FIN/711 v7

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Signature Assignment: Estimating Global Risk in Global Decisions Analysis

Suppose you are the Director of Finance at a multinational corporation (MNC) thats headquartered in the U.S. The cost of capital for this MNC is 12.2%.

You are examining this data that you received from the affiliates. The analyst in your department has prepared the tables below that show cash inflows and cash outflows in local currencies and exchange rates. Assume the data is for Quarter 4, 2004. Use this data to assess currency risk.

Table 1: Net Cash Inflows and Outflows in Local Currency and US Dollars for 2004

Currency

Total Inflow (Local Currency)

Total Outflow

Net Inflow/Outflow (Local Currency)

Expected Exchange Rate

Net Inflow/Outflow (US \$)

British Pounds (£)

17,000,000

7,000,000

10,000,000

1.5

15,000,000

12,000,000

2,000,000

10,000,000

0.8

8,000,000

Swedish Krona (SK)

20,000,000

120,000,000

-100,000,000

0.15

-15,000,000

Mexican Peso (MP)

90,000,000

10,000,000

80,000,000

0.1

8,000,000

Table 2: Range of Net Cash Inflows and Outflows for Quarter 4, 2004

Currency

Total Inflow (Local Currency)

Expected Exchange Rate

Net Inflow/Outflow (US \$)

British Pounds (£)

10,000,000

1.40

1.6

14,000,000

16,000,000

10,000,000

0.79

0.81

7,900,000

8,100,000

Swedish Krona (SK)

-100,000,000

0.14

0.16

-14,000,000

-16,000,000

Mexican Peso (MP)

80,000,000

0.06

0.11

4,800,000

8,800,000

Table 3: Cash Flows for Past 5 Years from Affiliates in 4 Countries

Currency

Net Inflow/Outflow (Local Currency)

Year 1

Net Inflow/Outflow (Local Currency)

Year 2

Net Inflow/Outflow (Local Currency)

Year 3

Net Inflow/Outflow (Local Currency)

Year 4

Net Inflow/Outflow (Local Currency)

Year 5

British Pounds (£)

10,000,000

20,000,000

60,000,000

50,000,000

10,000,000

10,000,000

13,000,000

135,000,000

135,000,000

160,000,000

Swedish Krona (SK)

-100,000,000

-120,000,000

-111,000,000

140,000,000

110,000,000

Mexican Peso (MP)

80,000,000

76,000,000

86,000,000

96,000,000

55,000,000

Write a 1,050- to 1,400-word analysis that addresses the following questions based on the data provided in the tables above:

1. In Table 2, which currency do you think is contributing the most risk? Why? Explain.

2. In Table 2 and Table 3, what approaches would you use to estimate exchange rate risk?

3. Will the approach be different for Table 2 versus Table 3? Why? Explain.

4. Is it necessary to look at these risks at all? Why or why not? Explain.

Cite at least 2 peer-reviewed sources to support your analysis.

Format your assignment according to APA guidelines.