Exchange Rate and Operating Exposure

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Eun & Resnick 4e
CHAPTER 9 Management of Economic Exposure

How to Measure Economic Exposure
International Finance in Practice: U.S. Firms Feel the Pain of Peso’s Plunge Operating Exposure: Definition
Illustration of Operating Exposure
Determinants of Operating Exposure
Managing Operating Exposure
Selecting Low-Cost Production Sites
International Finance in Practice: The Strong Yen and Toyota’s Choice Flexible Sourcing Policy
Diversification of the Market
R&D Efforts and Product Differentiation
Financial Hedging
International Finance in Practice: Porsche Powers Profit with Currency Plays CASE APPLICATION: Exchange Risk Management at Merck
Summary
MINI CASE: Economic Exposure of Albion Computers PLC

How to Measure Economic Exposure
1. Suppose the U.S. dollar substantially depreciates against the Japanese yen. The change in exchange rate a) Can have a significant economic consequences for U.S. firms. b) Can have a significant economic consequences for Japanese firms. c) Can have a significant economic consequences for both U.S. and Japanese firms. d) None of the above

Answer: c)

2. Suppose the U.S. dollar substantially depreciates against the Japanese yen. The change in exchange rate a) Will tend to weaken the competitive position of import-competing U.S. car makers. b) Will tend to strengthen the competitive position of import-competing U.S. car makers. c) Will tend to strengthen the competitive position of Japanese car makers at the expense of U.S. makers. d) None of the above

Answer: b)

3. When the Mexican peso collapsed in 1994, declining by 37 percent, a) U.S. firms that exported to Mexico and priced in peso were adversely affected. b) U.S. firms that exported to Mexico and priced in dollars were adversely affected. c) U.S. firms were unaffected by the peso collapse, since Mexico is such a small market. d) Both a) and b)

Answer: d)
Rationale: a) is obvious, the dollar value of revenue fell. Answer b) is less obvious, but those firm’s Mexican customers were less able to afford the imported goods.

4. When exchange rates change,
a) U.S. firms that sell only to domestic customers will be unaffected. b) U.S. firms that sell only to domestic customers can be affected if they compete against imports. c) U.S. firms that sell only to domestic customers will be affected, but only if they borrow in foreign currency to finance their domestic operations. d) Both a) and b)

Answer: b)

5. When exchange rates change,
a) This can alter the operating cash flow of a domestic firm. b) This can alter the competitive position of a domestic firm. c) This can alter the home currency values of a multinational firm’s assets and liabilities. d) All of the above

Answer: d)

6. Two recent studies have found a link between exchange rates and the stock prices of U.S. firms, a) This suggests that exchange rate changes can systematically affect the value of the firm by influencing its operating cash flows. b) This suggests that exchange rate changes can systematically affect the value of the firm by influencing the domestic currency values of its assets and liabilities. c) a) and b)

d) None of the above
Answer: c)

7. Economic exposure refers to(名词解释)
a) the sensitivity of realized domestic currency values of the firm’s contractual cash flows denominated in foreign currencies to unexpected exchange rate changes b) the extent to which the value of the firm would be affected by unanticipated changes in exchange rate c) the potential that the firm’s consolidated financial statement can be affected by changes in exchange rates d) ex post and ex ante currency exposures

Answer: b)

8. It is conventional to classify foreign currency exposures into the following types: a) economic exposure, transaction exposure, and translation exposure b) economic exposure, noneconomic exposure, and political exposure c)...
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