Assume That Mill Corporation, a U $\mu$ _t
Where the Term on the Left-Hand Side Is the Following

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:
PCF_t = a₀ + a₁et + $\mu$ _t
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:

A) if the foreign currency appreciates by 1%, Mill's cash flows will decline by 2%.
B) if the foreign currency appreciates by 1%, Mill's cash flows will decline by .2%.
C) if the foreign currency depreciates by 1%, Mill's cash flows will increase by 2%.
D) if the foreign currency depreciates by 1%, Mill's cash flows will decline by 2%.
E) none of the above

Correct Answer:

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