1. Multiple Currency Transaction Exposure Bill Reese International Finance 1

2. Estimate Net CFs in Each Currency 2 Example: This American company has exposure in four foreign currencies over the next quarter.

3. Weight the Dollar Cash Flows Pound15 15/16 =.9375 Can. $ 8 8/16 =.5 S. Krona -15 -15/16 = -.9375 Peso 8 8/16 =.5 16 The weights must add up to 1.0 3

4. Estimate Volatility (standard deviation) of XR Movements over the Quarter 4 British Pound – 2.8% Canadian Dollar – 2.7% Swedish Krona – 3.2% Mexican Peso – 3.5%

5. Estimate the Correlations Between these Currencies over the Next Quarter 5 PoundCanadian $S. KronaM. Peso Pound1.0.35.83.25 Canadian $.351.0.57.40 S. Krona.83.571.0.20 M. Peso.25.40.201.0

6. Build a Variance/Covariance Matrix 6 PoundCanadian $S. KronaM. Peso Pound0.0007840.00026460.000743680.000245 Canadian $0.00026460.0007290.000492480.000378 S. Krona0.000743680.000492480.0010240.000224 M. Peso0.0002450.0003780.0002240.001225

7. Build a Wtd. Var/Cov Matrix 7 PoundCanadian $S. KronaM. Peso Pound 0.0006890630.000124031-0.0006536250.000114844 Canadian $ 0.0001240310.00018225-0.000230850.0000945 S. Krona -0.000653625-0.000230850.0009-0.000105 M. Peso 0.0001148440.0000945-0.0001050.00030625

8. Determine the Portfolio Standard Deviation Variance = sum of cells in wtd. var/cov matrix =.00076536 Standard Deviation = Square Root of Variance = 2.7665% 8