Scribd Logo
Upload

Welcome to Scribd!

  • 19 views

    Chapter 12

    Uploaded by

    Haseeb Ahmed Shaikh
    The document discusses how multinational corporations can hedge economic and translation exposure from foreign exchange rate fluctuations. It describes assessing economic exposure based on foreign currency cash inflows and outflows. It also explains how restructuring operations by increasing revenue sensitivity and decreasing expense sensitivity to exchange rates can reduce economic exposure. The document further discusses hedging translation exposure when consolidating subsidiary financial statements using forward contracts, while noting limitations in hedging translation exposure.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd

    Chapter 12

    Uploaded by

    Haseeb Ahmed Shaikh
    19 views18 pages
    The document discusses how multinational corporations can hedge economic and translation exposure from foreign exchange rate fluctuations. It describes assessing economic exposure based on foreign currency cash inflows and outflows. It also explains how restructuring operations by increasing revenue sensitivity and decreasing expense sensitivity to exchange rates can reduce economic exposure. The document further discusses hedging translation exposure when consolidating subsidiary financial statements using forward contracts, while noting limitations in hedging translation exposure.

    Original Description:

    Copyright

    © © All Rights Reserved

    Available Formats

    PDF, TXT or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    The document discusses how multinational corporations can hedge economic and translation exposure from foreign exchange rate fluctuations. It describes assessing economic exposure based on foreign currency cash inflows and outflows. It also explains how restructuring operations by increasing revenue sensitivity and decreasing expense sensitivity to exchange rates can reduce economic exposure. The document further discusses hedging translation exposure when consolidating subsidiary financial statements using forward contracts, while noting limitations in hedging translation exposure.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    19 views18 pages

    Chapter 12

    Uploaded by

    Haseeb Ahmed Shaikh
    The document discusses how multinational corporations can hedge economic and translation exposure from foreign exchange rate fluctuations. It describes assessing economic exposure based on foreign currency cash inflows and outflows. It also explains how restructuring operations by increasing revenue sensitivity and decreasing expense sensitivity to exchange rates can reduce economic exposure. The document further discusses hedging translation exposure when consolidating subsidiary financial statements using forward contracts, while noting limitations in hedging translation exposure.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 18

    12 Managing Economic Exposure and Translation Exposure

    Chapter Objectives

    ▪ Explain how an MNC’s economic exposure can be


    hedged

    ▪ Explain how an MNC’s translation exposure can be


    hedged

    1 © 2015 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

    Economic exposure represents the impact of exchange rate


    fluctuations on a firm’s future cash flows. (Exhibit 12.1)
    Assessing economic exposure
    ▪ An MNC must measure its exposure to each currency in
    terms of its cash inflows and cash outflows. (Exhibit 12.2)
    Restructuring to reduce economic exposure, e.g.
    ▪ Increase sensitivity of revenues to exchange rate movements.
    ▪ Decrease sensitivity of expenses to exchange rate movements.
    (Exhibit 12.3 & 12.4)

    2 © 2015 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 12.1 How Managing Exposure Can Increase an
    MNC’s Value

    3 © 2015 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 12.2 Original Impact of Possible Exchange Rates on
    Cash Flows of Madison Co. (in Millions)

    4 © 2015 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.
    5 © 2015 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 12.3 Impact of Possible Exchange Rate Movements on
    Earnings under Two Alternative Operational Structures (in Millions)

    6 © 2015 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 Economic Exposure Based on the Original and
    Proposed Operating Structures

    7 © 2015 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

    Issues Involved in the Restructuring Decision


    ▪ Should the firm attempt to increase or reduce sales in new or
    existing foreign markets? (Exhibit 12.5)
    ▪ 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?

    8 © 2015 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 12.5 Restructuring Operations to Balance the Impact of
    Currency Movements on Cash Inflows and Outflows

    9 © 2015 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

    Hedging the sale of fixed assets by:


    ▪ Selling the currency forward in long-term forward contract
    ▪ Creating a liability in that currency that matches the
    expected value of the assets in the future.

    10 © 2015 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.
    11 © 2015 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 © 2015 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

    Limitations of hedging the sale of fixed assets:


    ▪ MNC may not know the date when it will sell the assets
    ▪ MNC may not know the price in the local currency at
    which it will sell them.

    13 © 2015 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

    Translation exposure occurs when each subsidiary’s


    financial data is translated to its home currency for
    consolidated financial statements.

    14 © 2015 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

    Hedging wit Forward Contracts


    ▪ Translation exposure can be hedged with forward or futures
    contracts.

    15 © 2015 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

    Limitations of hedging translation exposure:


    ▪ Inaccurate earnings forecasts - earnings in a future period are
    uncertain.
    ▪ Inadequate forward contracts for some currencies - forward
    contracts are not available for all currencies.
    ▪ Accounting distortions - the forward rate gain or loss reflects
    the difference between the forward rate and the future spot rate,
    whereas the translation gain or loss is caused by the change in
    the average exchange rate over the period in which the earnings
    are generated.
    ▪ Increased transaction exposure – the MNC may be increasing
    its transaction exposure

    16 © 2015 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.
    17 © 2015 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.
    18 © 2015 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.

    You might also like