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    International Financial Management Abridged 10 Edition: by Jeff Madura

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    Hiếu Nhi Trịnh

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    © All Rights Reserved
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    International Financial Management Abridged 10 Edition: by Jeff Madura

    Uploaded by

    Hiếu Nhi Trịnh
    86 views9 pages

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    QTTCQT_PPT_ch12

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    © All Rights Reserved
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    86 views9 pages

    International Financial Management Abridged 10 Edition: by Jeff Madura

    Uploaded by

    Hiếu Nhi Trịnh

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 9

    International Financial Management

    Abridged 10th Edition


    by Jeff Madura

    1 © 2011, 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use
    as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
    12
    Managing Economic Exposure and Translation
    Exposure
    Chapter Objectives
    This chapter will:

    A. Explain how an MNC’s economic exposure can be hedged

    B. Explain how an MNC’s translation exposure can be hedged

    2 © 2011, 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use
    as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
    Managing Economic Exposure

    1. Definition: economic exposure represents the impact


    of exchange rate fluctuations on a firm’s future cash
    flows.
    2. Assessing economic exposure
    3. Restructuring to reduce economic exposure, e.g.:
    a. Increase sensitivity of revenues to exchange rate movements
    b. Decrease sensitivity of expenses to exchange rate movements

    3 © 2011, 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use
    as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
    Issues Involved in the Restructuring
    Decision

    4 © 2011, 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use
    as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
    Exhibit 12.4 Hedging Economic Exposure

    5 © 2011, 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use
    as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
    A Case on Hedging Economic Exposure:
    Savor Co., a U.S. firm with exposure to the Euro
    1. Assessment of economic exposure: assess the
    relationship between the euro’s movement and each
    unit’s cash flows over last 9 quarters.
    a. Assessment of each unit’s exposure using regression analysis
    b. Identifying the source of each unit’s exposure
    2. Possible strategies to hedge economic exposure:
    a. Pricing policy
    b. Hedging with forward contracts
    c. Purchasing foreign supplies
    d. Financing with foreign funds
    e. Revising operations of other units

    6 © 2011, 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use
    as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
    A Case on Hedging Economic Exposure:
    Savor Co., a U.S. firm with exposure to the Euro
    1. Savor’s Hedging Solutions: instruct other units to do
    their financing in Euros as well
    2. Limitations of Savor’s Optimal Hedging Strategy:
    impact of Euro’s movements on Savor’s cash
    outflows is known with certainty but impact on cash
    inflows is uncertain.

    7 © 2011, 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use
    as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
    Hedging Exposure to Fixed Assets

    1. Hedging the sale of fixed assets by:


    a. Selling the currency forward in long-term forward contract
    b. Creating a liability in that currency that matches the expected
    value of the assets in the future.
    2. Limitations of hedging the sale of fixed assets:
    a. MNC may not know the date when it will sell the assets
    b. MNC may not know the price in the local currency at which
    it will sell them.

    8 © 2011, 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use
    as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
    Managing Translation Exposure

    1. Translation exposure occurs when an MNC translates


    each subsidiary’s financial data to its home currency
    for consolidated financial statements.
    2. Hedging with forward contracts
    3. Limitations of hedging translation exposure:
    a. Inaccurate earnings forecasts
    b. Inadequate forward contracts for some currencies
    c. Accounting distortions
    d. Increased transaction exposure

    9 © 2011, 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use
    as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

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