Reference no: EM133204979
Each of the following U.S. firms is expected to generate $40 million in net cash flows (after including the estimated cash flows from international sales if there are any) over the next year. Ignore any tax effects. Each firm has the same level of expected earnings. None of the firms have taken any positions in exchange rate derivatives to hedge their exchange rate risk. All payments for the international trade by each firm will occur one year from today.
Drinking Inc. has ordered imports from Germany, and its imports are invoiced in U.S. dollars. The dollar value of the payables (based on today's exchange rate) from its imports during this year is $50 million. It has no international sales.
Running Inc. has ordered imports from Jamaica, and its imports are invoiced in Jamaican dollars. The dollar value of the payables from its imports during this year is $15 million. Running also ordered imports from Argentina and these imports are denominated in dollars. The dollar value of these payables is $25 million. Running has no international sales.
Singing Co. ordered imports from Brazil, and its imports are invoiced in Brazilian real. The dollar value of the payables (based on today's exchange rate) from its imports during this year is $25 million. In addition, Singing exports to the Cayman Islands and its exports are denominated in Cayman dollars. The dollar value of the receivables (based on today's exchange rate) from its exports during this year is $12 million.
Walking Inc. ordered imports from Switzerland, and these imports are invoiced in Swiss francs. The dollar value of the payables (based on today's exchange rate) from its imports during this year is $17 million.
Based on this information, which firm is exposed to the most exchange rate risk? Show all calculations. Explain your answer