In this chapter, students will be able to understand and can apply the following concepts to business situations: foreign exchange competitive exposure; real appreciation and depreciation; Identifying, measure, and managing competitive exposure. | Topic #5: cOMPETITIVE Exposure and real currency appreciation L. Gattis Global Financial Management 1 Learning Objectives Understand and can apply the following concepts to business situations foreign exchange competitive exposure real appreciation and depreciation Identifying, measure, and managing competitive exposure Calculate real exchange rate appreciation and competitive exposure 2 3 Translation Exposure: potential reporting losses arising from exchange rate changes that result in a restatement in value of foreign-denominates assets and liabilities. ., . firm must reduce USD value of euro-denominated accounts receivable after EUR devalues. Losses may be reported in I/S and/or B/S. Transaction Exposure: potential short-term, cashflow losses arising from exchange rate changes that results in the payment of more USD or receipt of less USD. ., ., firm must pay more dollars to buy RMB to pay RMB-denominated invoice after appreciation of RMB against USD. Competitive Exposure: potential long-term, cashflow FX exposures that could affect business viability. ., Appreciation of Indian rupee makes outsourced manufacturing facility no longer competitive with outsourced Indonesian production. Types of Foreign Exchange Risks Nittany Winery Suppose the Nittany Winery, located in Pennsylvania, produces wine for export to Canada. What is Nittany Winery’s exposure to the CAD? Long? Gain if CAD appreciates? Short? Lose if CAD appreciates? What is Nittany Winery’s exposure to the EUR? No Exposure? Long? Gain if EUR appreciates? Short? Lose if EUR appreciates? Transaction vs. Competitive Risk Transaction Exposure Short-term gains and losses Cannot change prices in existing contracts Cannot move production Competitors cannot change prices or production in short run Competitive Exposure Long-term gains and losses and business viability Can change prices in new contracts Can move production, shut down, change production quantity and mix Competitors can change prices . | Topic #5: cOMPETITIVE Exposure and real currency appreciation L. Gattis Global Financial Management 1 Learning Objectives Understand and can apply the following concepts to business situations foreign exchange competitive exposure real appreciation and depreciation Identifying, measure, and managing competitive exposure Calculate real exchange rate appreciation and competitive exposure 2 3 Translation Exposure: potential reporting losses arising from exchange rate changes that result in a restatement in value of foreign-denominates assets and liabilities. ., . firm must reduce USD value of euro-denominated accounts receivable after EUR devalues. Losses may be reported in I/S and/or B/S. Transaction Exposure: potential short-term, cashflow losses arising from exchange rate changes that results in the payment of more USD or receipt of less USD. ., ., firm must pay more dollars to buy RMB to pay RMB-denominated invoice after appreciation of RMB against USD. Competitive .
