Merton Electronics Case Study
1) Merton Electronics is subject to transaction exposure. Transaction exposure is the gains or losses realized from the settlement of specific transactions that are denominated in a foreign currency. There are two main types of transaction exposure: 1) Purchasing or selling on credit goods denominated in a foreign currency 2) Borrowing or lending funds when repayments is going to be made in foreign currency. In respects to Merton’s Yen payments they are subject to transaction exposure. Merton imports a majority of its products from Japan. This results in payments due to suppliers that are denominated in Yen. Merton has locked in outstanding transactions with Fuji and Goldstone that would be affected by currency changes. 2) Similar to transaction exposure is operating exposure. The difference is that transaction exposure is how currency changes affect the value of certain previous transactions. Operating exposure is how changes in currency will affect the overall value of the company and its cash flows. Merton is also subject to this operating exposure. Merton receives such a large amount of inventories from Japan denominated in Yen so it is operating cash flows are hindered by changing exchange rates. Their operations and revenues are in USD so this is matched up properly but if the dollar depreciates it will cost Merton more to buy the materials to produce revenues. This will affect its operating cash flow and force Merton to increase prices to hold margins steady. 3) One good thing about Merton Electronics is their exposure to its Taiwanese payments. Merton is exposed to Taiwan because they purchase materials directly from them. Fortunately Taiwan ties their currency directly to the USD. Taiwanese authorities do everything they can to make it so their currency stays more or less directly correlated with the USD. This means that no matter what happens to the USD the Taiwanese currency will see...
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