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1、Multinational Financial Management Alan Shapiro7th Edition J.Wiley&SonsPower Points byJoseph F.Greco,Ph.D.California State University,Fullerton1CHAPTER 11MEASURING AND MANAGING ECONOMIC EXPOSURE2CHAPTER OVERVIEWI.FOREIGN EXCHANGE RISK AND ECONOMIC EXPOSUREII.THE ECONOMIC CONSEQUENCES OF EXCHANGE RAT
2、E CHANGESIII.IDENTIFYING ECONOMIC EXPOSUREIV.CALCULATING ECONOMIC EXPOSUREV.AN OPERATIONAL MEASURE OF EXCHANGE RISKVI.MANAGING OPERATING EXPOSURE3PART I.FOREIGN EXCHANGE RISK AND ECONOMIC EXPOSUREI.FOREIGN EXCHANGE RISKA.Economic exposurefocuses on the impact of currencyfluctuations on firms value.1
3、.Expectations about the fluctuation must be incorporated in all basicdecisions of the firm.4FOREIGN EXCHANGE RISK AND ECONOMIC EXPOSURE2.Definitions:a.Accounting exposureimpact on firms balance sheetb.Economic exposure1.)Transaction 2.)Operating5FOREIGN EXCHANGE RISK AND ECONOMIC EXPOSURETHE REAL EX
4、CHANGE RATE6FOREIGN EXCHANGE RISK AND ECONOMIC EXPOSUREB.Real Exchange Rates and Risk1.Nominal v.real exchange rates:the real rate has been adjusted for price changes.7FOREIGN EXCHANGE RISK AND ECONOMIC EXPOSURE3.SUMMARYa.the economic impact of a currency change depends on the offset by the differen
5、ce in inflation rates or the real exchange rate.b.It is the relative price changes that ultimately determine a firms long-run exposure.8PART II.THE ECONOMIC CONSEQUENCES OF EXCHANGE RATE CHANGESII.ECONOMIC CONSEQUENCESA.Transaction exposure1.On-balance sheet2.Off-balance sheet9THE ECONOMIC CONSEQUEN
6、CES OF EXCHANGE RATE CHANGESII.ECONOMIC CONSEQUENCES(cont)B.Operating Exposure:real rate change1.Pricing flexibility is key2.Product differentiation3.Substitution of inputs10THE ECONOMIC CONSEQUENCES OF EXCHANGE RATE CHANGESII.SUMMARYThe sector of the economy in which thefirm operates;the sources of
7、 the firms inputs;andfluctuations in the real exchange ratedelineate the firms true economicexposure.11PART III.IDENTIFYING ECONOMIC EXPOSUREIII.CASE STUDIES OF ECONOMIC EXPOSUREA.ASPEN SKIING COMPANY1.Firms exchange rate risk affected its sales revenues.12IDENTIFYING ECONOMIC EXPOSUREA.ASPEN SKIING
8、 COMPANY(cont)2.Although there was no translationrisk,the global market with its exchange rate risk and its competitors impacted market demand.13IDENTIFYING ECONOMIC EXPOSUREB.PETROLEOS MEXICANOS(PEMEX)1.The firms exchange rate riskaffected cost but not revenues.2.Economic impacta.Revenues:noneb.Cos
9、ts:decreasedc.Net effect:increased US$flows14IDENTIFYING ECONOMIC EXPOSUREC.TOYOTA MOTOR COMPANY1.Exchange rate risk affected BOTHrevenues and costs.2.Flow back effect:previously exported goods returnwith increased domestic competition.3.Lower profit margins domestically15PART IV.CALCULATING ECONOMI
10、C EXPOSUREIV.A quantitative assessment of economicexposure depends on underlying assumptions concerning:A.future cash flows;B.sensitivity to exchange ratechanges.16PART V.AN OPERATIONAL MEASURE OF EXCHANGE RISKV.NEED FOR A WORKABLE APPROACH A.Regression Analysis1.Variablesa.Independent:changes in pa
11、rents cash flowsb.Dependent:Average nominal exchange rate change.17AN OPERATIONAL MEASURE OF EXCHANGE RISKB.REGRESSION EQUATION-approach based on the operational definition of the exchange risk faced by a parent or one of its affiliates:-a company faces exchange risk to the extent that variations in
12、 the dollar value of the units cash flows are correlated with variations in the nominal exchange rate18AN OPERATIONAL MEASURE OF EXCHANGE RISKwhere CFt=CFt-CFt-1 andCFt is the dollar value of total affiliate(parent)cash flows in period t EXCHt=EXCHt-EXCHt-1 equals the average nominal exchange rate d
13、uring period t u =a random error term 19AN OPERATIONAL MEASURE OF EXCHANGE RISK1.Output measures:a.Beta coefficient(b)measures the association of changes in cash flows to exchange rate changes.20AN OPERATIONAL MEASURE OF EXCHANGE RISKb.the higher the percentage change of cash flow to changes in exch
14、ange rates,the greater the economic exposure(higher beta values).21AN OPERATIONAL MEASURE OF EXCHANGE RISKVI.SUMMARY:A.The focus of the accounting profession on the balance sheet impact of currency changes has led to ignoring the important impact on future cash flows.22AN OPERATIONAL MEASURE OF EXCH
15、ANGE RISKB.For firms incurring costs and selling products in foreign countries,the net effect of currency changes may be less important in the long run.23AN OPERATIONAL MEASURE OF EXCHANGE RISKC.To measure exposure properly,you must focus on inflation-adjusted or real exchange rates instead of nomin
16、al or actual exchange rates.24AN OPERATIONAL MEASURE OF EXCHANGE RISKD.It is difficult in practice to determine what the actual economic impact of a currency change will be.25PART VI.MANAGING OPERATING EXPOSUREI.INTRODUCTIONOperating exposure management requireslong-term operating adjustments.A.Real
17、 v.Nominal Changes1.Relative price changes leads to marketing and/orproduction revisions26MANAGING OPERATING EXPOSUREB.Proactive Marketing and ProductionInitiatives 1.Marketing:market selectionproduct strategypricing strategypromotional strategy27MANAGING OPERATING EXPOSUREB.Proactive Marketing and
18、ProductionInitiatives(cont)2.Production:product sourcinginput mixplant locationraising productivity28MANAGING OPERATING EXPOSUREII.Marketing Management AdjustmentsA.Market Selection1.use advantage to carve out market share2.Market segmentation29MANAGING OPERATING EXPOSUREB.Pricing strategy:Expectati
19、ons critical1.If HC value falls,exporter gainscompetitive advantage by increasing unit profitability and market share.2.The higher price elasticity of demand,the more currency riskthe firm faces by product substitution.30MANAGING OPERATING EXPOSURE3.Following HC depreciation,localfirm may have much
20、more freedom in its pricing.C.Promotional Strategy 31MANAGING OPERATING EXPOSURED.Product Strategyexchange rate changes may alter1.The timing of new product introductions,2.Product deletion,3.Product innovation.32 MANAGING OPERATING EXPOSUREIII.Product Management Adjustmentsproduct sourcing and plan
21、t location are the principal variables to manipulate.A.Input mixB.Shift production among plantsC.Plant locationD.Raising productivity33MANAGING OPERATING EXPOSUREIV.Planning For Exchange-Rate ChangesA.With better planning and more competitive options,firms can change strategies substantiallyB.before
22、 the impact of an currency change makes itself felt.C.Implication:compaction of adjustment period following an exchange-rate change.34MANAGING OPERATING EXPOSUREV.Financial Management of Exchange Rate Risk:Financial managers Role in Marketing and ProductionA.Provide local manager with fore-casts of
23、inflation and exchange-rate changes.B.Identify and focus on competitive exposure.35MANAGING OPERATING EXPOSUREC.Design the evaluation criteria so that operating managers neitherrewarded or penalized forunexpected exchange-ratechanges.D.Estimate and hedge the operatingexposure after adjustments made.36