Why did Miller and Modigliani claim that hedging exchange rate risk was irrelevant to the value of the firm?

What will be an ideal response?

Answer: In general, M & M argued that purely financial risk management activities did nothing to change the value of the firm's assets. Changes in asset value only occurred if a transaction changed the firm's taxes or affected its investment decisions. Furthermore, if hedging simply reduces the unsystematic risk of the cash flows while leaving systematic risk unchanged as well as the expected cash flow, it will have no effect on the firm's value.