Questions to consider:
Consider Reali Marble Works’ exchange rate exposures. Which are the two or three most important exchange rates to which Reali is exposed (and why is Reali exposed to these rates)? How would the company be affected (qualitatively) by large swings (in either direction) by these exchange rates?
How has Karen Reali’s (currency exchange rate risk exposure) problem been changed due to the existence of the Eurozone?
How much of an unexpected move in exchange rates would be required for cash flow at Reali Marble Works to be less than €1 million in 2014 (that is, two years out)? Is such an exchange rate change reasonably likely? To simplify this problem, pretend that the only relevant currencies are $ and €: treat all non-US sales as being denominated in Euro. Assume inflation rates are 4% in the US and 2% in Europe. (The €1 million minimum goal is because the shareholders of Reali Marble Works expect and rely upon annual dividends, to be paid from after-tax cash flow.)
How does this answer change if Reali Marble Works also has €10 million of oustanding debt, requiring a 10% annual interest payment?
