Chapter Twelve Management of Economic exposure 12 Chapter objectives This chapter provides a way to measure economic exposure, discusses its determinants, and presents methods for managing and hedging economic exposure
INTERNATIONAL FINANCIAL MANAGEMENT EUN / RESNICK Second Edition 12 Chapter Twelve Management of Economic Exposure Chapter Objectives: This chapter provides a way to measure economic exposure, discusses its determinants, and presents methods for managing and hedging economic exposure
Chapter Outline o Three Types of Exposure o How to measure economic exposure O perating Exposure: Defil inition An Illustration of Operating Exposure Determinants of Operating Exposure Managing Operating Exposure McGraw-Hilylrwoin 12-1 Copyright@ 2001 by The McGraw-Hill Companies, Inc. All rights
McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 12-1 Chapter Outline ⚫ Three Types of Exposure ⚫ How to Measure Economic Exposure ⚫ Operating Exposure: Definition ⚫ An Illustration of Operating Exposure ⚫ Determinants of Operating Exposure ⚫ Managing Operating Exposure
Three Types of Exposure ● Economic Exposure Exchange rate risk as applied to the firms competitive position o Transaction Exposure Exchange rate risk as applied to the firms home currency cash flows. The subject of Chapter 13 Translation Exposure Exchange rate risk as applied to the firms consolidated financial statementS. The subject of Chapter 14 McGraw-Hilylrwoin 12-2 Copyright@ 2001 by The McGraw-Hill Companies, Inc. All rights
McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 12-2 ⚫ Economic Exposure ◼ Exchange rate risk as applied to the firm’s competitive position. ⚫ Transaction Exposure ◼ Exchange rate risk as applied to the firm’s home currency cash flows. The subject of Chapter 13. ⚫ Translation Exposure ◼ Exchange rate risk as applied to the firm’s consolidated financial statements. The subject of Chapter 14 Three Types of Exposure
How to measure Economic exposure o Economic exposure is the sensitivity of the future home currency value of the firms assets and liabilities and the firm's operating cash flow to random changes in exchange rates o There exist statistical measurements of sensitivity McGraw-Hilylrwoin 12-3 Copyright@ 2001 by The McGraw-Hill Companies, Inc. All rights
McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 12-3 How to Measure Economic Exposure ⚫ Economic exposure is the sensitivity of the future home currency value of the firm’s assets and liabilities and the firm’s operating cash flow to random changes in exchange rates. ⚫ There exist statistical measurements of sensitivity
How to measure Economic exposure o If a u.s. mnc were to run a regression on the dollar value(p) of its British assets on the dollar pound exchange rate, S($/f), the regression would be of the form P=a+b×S+e Where a is the regression constant and e is the random error term with mean zero. The regression coefficient b measures the sensitivity of the dollar value of the assets(p) to the exchange rate, S McGraw-Hilylrwoin 124 Copyright@ 2001 by The McGraw-Hill Companies, Inc. All rights
McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 12-4 How to Measure Economic Exposure ⚫ If a U.S. MNC were to run a regression on the dollar value (P) of its British assets on the dollar pound exchange rate, S($/£), the regression would be of the form: P = a+bS +e Where a is the regression constant and e is the random error term with mean zero. The regression coefficient b measures the sensitivity of the dollar value of the assets (P) to the exchange rate, S