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1、CHAPTER 11Defining Foreign Exchange Risk 第一页，共二十六页。PART I. FOREIGN EXCHANGE RISK AND ECONOMIC EXPOSUREI.FOREIGN EXCHANGE RISKA.Economic exposurefocuses on the impact of currencyfluctuations on firms value.1 .The most important aspect of foreign exchange risk management:第二页，共二十六页。FOREIGN EXCHANGE RIS
2、K AND ECONOMIC EXPOSURE2. Definition:Economic exposure =Transaction exposure +Operating exposure:arises because currency fluctuations alter a companys future revenues and expenses.第三页，共二十六页。FOREIGN EXCHANGE RISK AND ECONOMIC EXPOSURETo measure operating exposure requires a longer-term perspective.i.
3、e. Cost and price competitiveness could be affected by exchange rate changes第四页，共二十六页。FOREIGN EXCHANGE RISK AND ECONOMIC EXPOSUREOperating Exposure begins:the moment a firm starts to invest in a market subject to foreign competition or in sourcing goods or inputs abroad第五页，共二十六页。FOREIGN EXCHANGE RIS
4、K AND ECONOMIC EXPOSUREThe new investment includes:New product developmentA distribution networkBrand name developmentMarketingForeign supply contractsProduction facilities第六页，共二十六页。FOREIGN EXCHANGE RISK AND ECONOMIC EXPOSUREB. Real Exchange Rates Changes and RiskNominal v. real exchange rates:real
5、rate has been adjusted forprice changes.第七页，共二十六页。FOREIGN EXCHANGE RISK AND ECONOMIC EXPOSUREC. Implications1. If nominal rates change with an equal price change, no alteration to cash flows. 2. If real rates change, it causes relative price changes and changes in purchasing power.第八页，共二十六页。FOREIGN
6、EXCHANGE RISK AND ECONOMIC EXPOSUREA in the real value of a currency:makes exports and import-competing goods more competitiveAn currency makes:imports and export-competing goods more competitive第九页，共二十六页。FOREIGN EXCHANGE RISK AND ECONOMIC EXPOSUREDuring an appreciation of home currencies:Exporters
7、face two choices:#1 keep prices constant (but lose sales)or #2 adjust prices to foreign currency to maintain market share (lose profits)第十页，共二十六页。FOREIGN EXCHANGE RISK AND ECONOMIC EXPOSURE3. SUMMARYa.the economic impact of a currency change depends on the offset by the difference in inflation rates
8、 or the change in real exchange rates.b.It is the relative price changes that ultimately determine a firms long-run exposure. 第十一页，共二十六页。PART II. THE ECONOMIC CONSEQUENCES OF EXCHANGE RATE CHANGESI.ECONOMIC CONSEQUENCESThe impact on Operating Exposure of a real rate change depends upon:Pricing flexi
9、bility and1.Price elasticity of demand2.Degree of product differentiation3.The Ability to shift production and the substitution of inputs第十二页，共二十六页。If HC Appreciates第十三页，共二十六页。If HC AppreciatesCan the firm maintain its profit margins both at home and abroad?If price elasticity of demand is low, the
10、more price flexibility a firm has.i.e. Availability of good substitutes第十四页，共二十六页。If HC Appreciatesprice elasticity depends on degree of differentiationThe greater the differentiation, the more the firm can control its prices.e.g. Mercedes Benz cars第十五页，共二十六页。If HC Appreciatese.g. Japanese car maker
11、s in the late 1980s第十六页，共二十六页。PART II.MANAGING OPERATING EXPOSUREI.INTRODUCTIONOperating exposure management requires long-term operating adjustments and the involvement of all departments.第十七页，共二十六页。MANAGING OPERATING EXPOSUREII.A. Market Selection: use competitive advantage to carve out market sha
12、re when currency values change第十八页，共二十六页。MANAGING OPERATING EXPOSUREB. Pricing strategy: Expectations critical1.If HC depreciates, exporter gainscompetitive advantage by increasing unit profitability or market share.2.The higher price elasticity of demand, the more currency riskthe firm faces by oth
13、er product substitution.第十九页，共二十六页。MANAGING OPERATING EXPOSUREC. Product Strategyexchange rate changes may alter1.The timing of new product introductions,2.Product deletion 3.Product innovations 第二十页，共二十六页。MANAGING OPERATING EXPOSUREIII.Product Management AdjustmentsA.Input mix “shop the world”B.Shi
14、ft production among plantsC.Plant relocationD.Raising productivity第二十一页，共二十六页。MANAGING OPERATING EXPOSUREIV. Planning For Exchange-Rate ChangesA.Develop contingency planswith plausible scenariosbefore the impact of acurrency change makes itself felt.e.g. flexible mfg systems第二十二页，共二十六页。MANAGING OPER
15、ATING EXPOSUREV. Financial Management of Exchange Rate Risk: Structure the firms liabilities in such a way that the reduction in asset earnings is matched by corresponding decrease in cost of servicing liabilities.第二十三页，共二十六页。MANAGING OPERATING EXPOSUREA.Provide local manager with forecasts of infla
16、tion and exchange-rate changes.B.Identify and focus on competitive exposure.第二十四页，共二十六页。MANAGING OPERATING EXPOSUREC. Design the evaluation criteria so that operating managers neitherrewarded or penalized for unexpected exchange-rate changes.第二十五页，共二十六页。内容(nirng)总结CHAPTER 11。I.FOREIGN EXCHANGE RISK。I.ECONOMIC CONSEQUENCES。D.Raising productivity。A.Develop contingency plans第二十六页，共二十六页。