Assume that Mill Corporation, a U.S.-based MNC, has applied the following regression model to estimate the sensitivity of its cash flows to exchange rate movements: PCFt = a0 + a1et + mt where the term on the left-hand side is the percentage change in inflation-adjusted cash flows measured in the firm’s home currency over period t, and et is the percentage change in the exchange rate of the currency over period t. The regression model estimates a coefficient of a1 of -2. This indicates that:
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____ is (are) a determinant of translation exposure.
____ is (are) a determinant of translation exposure.
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