Question 3- Exchange Rate Exposures

A domestic firm, Home Company, is evaluating the effect of an appreciation in the home currency on the firm's economic exposure. In each of the following categories of economic exposure, indicate whether the domestic currency appreciation is likely to have a positive or negative effect on Home Company's cash flow. State your conclusion and offer a one-sentence explanation for you conclusion as in the example shown for the first row.

Direct economic exposure:
1. Revenue from sales abroad: negative - foreign revenue worth less in home currency terms
2. Cost of inputs sourced (purchased) abroad
3. Profits repatriated from abroad
4. Foreign tax liabilities

Indirect economic exposure
1. Position vis-à-vis a competitor who sources abroad
2. Domestic competitor who sells abroad
3. Foreign competitor who sells in Home Co.'s country
4. Supplier who sources abroad
5. Customer who sells abroad
6. Customer who sources abroad