Estimating Global Risk in Global Decisions Analysis

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

CurrencyTotal Inflow (Local Currency)Total OutflowNet Inflow/Outflow (Local Currency)Expected Exchange RateNet Inflow/Outflow (US $)
British Pounds (£)17,000,0007,000,00010,000,0001.515,000,000
Canadian Dollars (C$)12,000,0002,000,00010,000,0000.88,000,000
Swedish Krona (SK)20,000,000120,000,000-100,000,0000.15-15,000,000
Mexican Peso (MP)90,000,00010,000,00080,000,0000.18,000,000

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

CurrencyTotal Inflow (Local Currency)Expected Exchange RateNet Inflow/Outflow (US $)
British Pounds (£)10,000,0001.401.614,000,00016,000,000
Canadian Dollars (C$)10,000,0000.790.817,900,0008,100,000
Swedish Krona (SK)-100,000,0000.140.16-14,000,000-16,000,000
Mexican Peso (MP)80,000,0000.060.114,800,0008,800,000

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

CurrencyNet Inflow/Outflow (Local Currency)Year 1Net Inflow/Outflow (Local Currency)Year 2Net Inflow/Outflow (Local Currency)Year 3Net Inflow/Outflow (Local Currency)Year 4Net Inflow/Outflow (Local Currency)Year 5
British Pounds (£)10,000,00020,000,00060,000,00050,000,00010,000,000
Canadian Dollars (C$)10,000,00013,000,000135,000,000135,000,000160,000,000
Swedish Krona (SK)-100,000,000-120,000,000-111,000,000140,000,000110,000,000
Mexican Peso (MP)80,000,00076,000,00086,000,00096,000,00055,000,000

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.

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