Measuring Exposure to Exchange Rate Fluctuations
Chapter 10
Measuring Exposure to Exchange Rate Fluctuations Lecture Outline
Is Exchange Rate Risk Relevant? Transaction Exposure
Estimating “Net” Cash Flows in Each Currency Measuring the Potential Impact of the Currency Exposure Assessing Transaction Exposure Based on Value-at-Risk
Economic Exposure
Economic Exposure to Local Currency Appreciation Economic Exposure to Local Currency Depreciation Economic Exposure of Domestic Firms Measuring Economic Exposure
Translation Exposure
Does Translation Exposure Matter? Determinants of Translation Exposure Examples of Translation Exposure
148
Chapter 10: Measuring Exposure to Exchange Rate Fluctuations
149
Chapter Theme
This chapter distinguishes among three forms by which MNCs are exposed to exchange rate risk: (1) transaction exposure, (2) economic exposure, and (3) translation exposure. Each firm differs in degree of exposure. A firm should be able to measure its degree of each type of exposure as described in this chapter. Then, it can decide how to cover that exposure using methods described in the following two chapters.
Topics to Stimulate Class Discussion
1. Describe in general terms how you would measure the transaction exposure of a particular MNC. 2. What is the relationship between transaction exposure and economic exposure? 3. A small firm in New York City produces various metals and sells them to local manufacturers. It has no foreign sales and purchases all supplies and materials locally. Does transaction exposure exist for this firm? Does economic exposure exist for this firm?
POINT/COUNTER-POINT: Should Investors Care about an MNC’s Translation Exposure?
POINT: No. The present value of an MNC’s cash flows is based on the cash flows that the parent receives. Any impact of the exchange rates on the financial statements is not important unless cash flows are affected. MNCs should focus their energy on assessing the exposure of their cash flows to exchange rate movements and should not be concerned
Measuring Exposure to Exchange Rate Fluctuations Lecture Outline
Is Exchange Rate Risk Relevant? Transaction Exposure
Estimating “Net” Cash Flows in Each Currency Measuring the Potential Impact of the Currency Exposure Assessing Transaction Exposure Based on Value-at-Risk
Economic Exposure
Economic Exposure to Local Currency Appreciation Economic Exposure to Local Currency Depreciation Economic Exposure of Domestic Firms Measuring Economic Exposure
Translation Exposure
Does Translation Exposure Matter? Determinants of Translation Exposure Examples of Translation Exposure
148
Chapter 10: Measuring Exposure to Exchange Rate Fluctuations
149
Chapter Theme
This chapter distinguishes among three forms by which MNCs are exposed to exchange rate risk: (1) transaction exposure, (2) economic exposure, and (3) translation exposure. Each firm differs in degree of exposure. A firm should be able to measure its degree of each type of exposure as described in this chapter. Then, it can decide how to cover that exposure using methods described in the following two chapters.
Topics to Stimulate Class Discussion
1. Describe in general terms how you would measure the transaction exposure of a particular MNC. 2. What is the relationship between transaction exposure and economic exposure? 3. A small firm in New York City produces various metals and sells them to local manufacturers. It has no foreign sales and purchases all supplies and materials locally. Does transaction exposure exist for this firm? Does economic exposure exist for this firm?
POINT/COUNTER-POINT: Should Investors Care about an MNC’s Translation Exposure?
POINT: No. The present value of an MNC’s cash flows is based on the cash flows that the parent receives. Any impact of the exchange rates on the financial statements is not important unless cash flows are affected. MNCs should focus their energy on assessing the exposure of their cash flows to exchange rate movements and should not be concerned