Jacko Plc Is a UK-Based MNC with Net Cash Inflows

question 38

Multiple Choice

Jacko plc is a UK-based MNC with net cash inflows of Singapore dollars and net cash inflows of Sunland francs. These two currencies are highly negatively correlated in their movements against the pound. Kriner plc is a UK-based MNC that has the same exposure as Jacko plc in these currencies, except that its Sunland francs represent cash outflows. Which firm has a high exposure to exchange rate risk?

• A) Jacko plc
• B) Kriner plc
• C) The firms have about the same level of exposure.
• D) Neither firm has any exposure.

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Definitions:

CAPM

Capital Asset Pricing Model; a financial model that describes the relationship between systematic risk and expected return for assets, particularly stocks.

Beta

A measure of a stock's volatility in relation to the overall market.

Required Return

The minimum expected return an investor seeks for holding a risky investment, considering both time value of money and risk factors.

Expected Return

The weighted average of all possible returns from an investment, accounting for the probability of each outcome.