Strategies for the management of operating exposure emphasize the structuring of firm operations in order to create matching streams of cash flows by currency. This is termed natural hedging. Expected versus Unexpected Changes in Cash Flows
Operating exposure is far more important for the long run health of a business than changes caused by transaction or translation exposure. However, operating exposure is inevitably subjective because it depends on estimates of future cash flows changes over an arbitrary time horizon. An expected change in foreign exchange rates is not included in the definition of operating exposure, because both management and investors should have factored this information into their evaluation of anticipated operating results and market value. From a broader perspective, operating exposure is not only the sensitivity of a firm’s future cash flows to unexpected changes in foreign exchange rates, but also its sensitivity to other key macroeconomic variables. Strategic Management of Operating Exposure
The objective of operating exposure management is to anticipate and influence the effect of unexpected changes in exchange rates on a firm’s future cash flow, rather than being forced into passive reaction to such changes. This task can be accomplished if a firm diversifies both its operations and financing base.
Diversifying operations means diversifying sales, location of production facilities, and raw material sources.
Diversifying the financing base means raising funds in more than one capital market and in more than one currency
Operating and transaction exposures can be partially managed by adopting operating or financing policies that offset anticipated foreign exchange exposures. Six of the most commonly employed proactive policies are as follows: 1. Matching currency cash flows-offset an anticipated continuous long exposure to a particular currency is to acquire debt...