A US-Based Multinational Corporation (MNC)currently Has an Investment Portfolio That Includes

question 12

Multiple Choice

A U.S.-based multinational corporation (MNC) currently has an investment portfolio that includes Japanese securities valued at 10,000,000 yen.The company also owes its Japanese suppliers 12,000,000 yen.Which of the following statements is most correct?

• A) The MNC is not exposed to exchange rate risk because it holds both assets and liabilities denominated in yen.
• B) The MNC will be exposed to exchange rate losses if the yen declines in value relative to the dollar.
• C) The MNC will be exposed to exchange rate losses if the yen increases in value relative to the dollar.
• D) The MNC can avoid exchange rate risk by paying its Japanese liabilities with dollars.

---

Definitions:

Comparative Advantage

The skill of an entity—be it an individual, enterprise, or nation—to manufacture a product or deliver a service at a reduced opportunity cost than that of its competitors.

Production Possibilities

The various combinations of goods and services that an economy can produce, given its technological capabilities and available resources.

Comparative Advantage

The ability of an individual, firm, or country to produce a good or service at a lower opportunity cost than competitors, leading to specialized production and trade benefits.

Specialization

The process in which individuals, firms, or countries focus on producing a narrow range of goods or services to gain greater efficiencies and increase productivity.