Lecture International financial management - Chapter 12 explain how an MNC’s economic exposure can be hedged, and how an MNC’s translation exposure can be hedged. Inviting you refer. | 1 1 2 12 Managing Economic Exposure and Translation Exposure Explain how an MNC’s economic exposure can be hedged Explain how an MNC’s translation exposure can be hedged 2 Chapter Objectives 2 3 Managing Economic Exposure Economic exposure represents the impact of exchange rate fluctuations on a firm’s future cash flows. (Exhibit ) Assessing economic exposure An MNC must measure its exposure to each currency in terms of its cash inflows and cash outflows. (Exhibit ) 4 Managing Economic Exposure Restructuring to reduce economic exposure, .: Increase sensitivity of revenues to exchange rate movements. Decrease sensitivity of expenses to exchange rate movements. (Exhibit & ) Expediting the Analysis with Computer Spreadsheets Determining the sensitivity of cash flows (ignoring tax effects) to alternative exchange rate scenarios can be expedited by using a computer to create a spreadsheet similar to Exhibit . 5 Exhibit How Managing Exposure Can Increase an MNC’s Value 6 Exhibit Original Impact of Possible Exchange Rates on Cash Flows of Madison Co. (in Millions) 7 Exhibit Impact of Possible Exchange Rate Movements on Earnings under Two Alternative Operational Structures (in Millions) 8 Exhibit Economic Exposure Based on the Original and Proposed Operating Structures 9 Issues Involved in the Restructuring Decision Should the firm attempt to increase or reduce sales in new or existing foreign markets? Should the firm increase or reduce its dependency on foreign suppliers? Should the firm establish or eliminate production facilities in foreign markets? Should the firm increase or reduce its level of debt denominated in foreign currencies? 10 Exhibit How to Restructure Operations to Balance the Impact of Currency Movements on Cash Inflows and Outflows 11 A Case on Hedging Economic Exposure: Savor Co., a . firm with exposure to the Euro Assessment of economic exposure: assess the relationship between the euro’s movement . | 1 1 2 12 Managing Economic Exposure and Translation Exposure Explain how an MNC’s economic exposure can be hedged Explain how an MNC’s translation exposure can be hedged 2 Chapter Objectives 2 3 Managing Economic Exposure Economic exposure represents the impact of exchange rate fluctuations on a firm’s future cash flows. (Exhibit ) Assessing economic exposure An MNC must measure its exposure to each currency in terms of its cash inflows and cash outflows. (Exhibit ) 4 Managing Economic Exposure Restructuring to reduce economic exposure, .: Increase sensitivity of revenues to exchange rate movements. Decrease sensitivity of expenses to exchange rate movements. (Exhibit & ) Expediting the Analysis with Computer Spreadsheets Determining the sensitivity of cash flows (ignoring tax effects) to alternative exchange rate scenarios can be expedited by using a computer to create a spreadsheet similar to Exhibit . 5 Exhibit How Managing Exposure Can Increase an .
