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Estimating Global Risk Thesis

FIN/711 v

7

Signature Assignment: Estimating Global Risk in Global Decisions Analysis

FIN/711 v7

Page 2 of 2

 

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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) that’s 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 $)
British Pounds (£) 17,000,000 7,000,000 10,000,000 1.5 15,000,000
Canadian Dollars (C$) 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 $)
British Pounds (£) 10,000,000 1.40 1.6 14,000,000 16,000,000
Canadian Dollars (C$) 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
Canadian Dollars (C$) 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 guide