​Magent Co

question 38

Multiple Choice

​Magent Co. is a U.S. company that has exposure to the Swiss franc (SF) and Danish kroner (DK) . It has net inflows of SF200 million and net outflows of DK500 million. The present exchange rate of the SF is about $.40 while the present exchange rate of the DK is $.10. Magent Co. has not hedged these positions. The SF and DK are highly correlated in their movements against the dollar. If the dollar weakens, then Magent Co. will:

• A) ​benefit, because the dollar value of its SF position exceeds the dollar value of its DK position.
• B) ​benefit, because the dollar value of its DK position exceeds the dollar value of its SF position.
• C) ​be adversely affected, because the dollar value of its SF position exceeds the dollar value of its DK position.
• D) ​be adversely affected, because the dollar value of its DK position exceeds the dollar value of its SF position.

---

Definitions:

Principal-Agent

Describes the relationship between a principal (e.g., an employer) and an agent (e.g., an employee), highlighting the potential issues arising from differing interests and information asymmetry.

Payment Scheme

The structure or method by which payments are made and received, often detailing terms, conditions, and the timing of payments.

Inefficient

A condition or situation where resources are not used to their best potential, resulting in lost opportunities or wastefulness.

Asymmetric Information

A situation in which one party in a transaction has more or superior information compared to the other, potentially leading to imbalances in transactions and market failures.