Spectrum’s Economic Exposure
On the basis of current information, it is impossible to determine the precise economic impact of the krona devaluation. Therefore, three different scenarios have been constructed, with varying degrees of plausibility, and Spectrum’s economic exposure has been calculated under each scenario. The three scenarios are
1. All variables remain the same.
2. Krona sales prices and all costs rise; volume remains the same.
3. There are partial increases in prices, costs, and volume.
Scenario 1: All Variables Remain the Same. If all prices remain the same (in kronor) and sales volume does not change, then Spectrum’s krona cash flow will stay at SKr 3,600,000. At the new exchange rate, this amount will equal $720,000 (3,600,000/5). Then the net loss in dollar operating cash flow in year 1 can be calculated as follows: