Artikel Wall Street

Topics: Exchange rate, United States dollar, Foreign exchange market Pages: 22 (11822 words) Published: November 7, 2014
Eun−Resnick: International
Financial Management,
Fourth Edition

III. Foreign Exchange
Exposure and Management

9. Management of
Economic Exposure

© The McGraw−Hill
Companies, 2007

CHAPTER

CHAPTER OUTLINE

9

Management of
Economic Exposure
How to Measure Economic Exposure
Operating Exposure: Definition
Illustration of Operating Exposure
Determinants of Operating Exposure
Managing Operating Exposure
Selecting Low-Cost Production Sites
Flexible Sourcing Policy
Diversification of the Market
R&D Efforts and Product Differentiation
Financial Hedging
CASE APPLICATION: Exchange Risk Management at Merck

Summary
Key Words
Questions
Problems
Internet Exercises
MINI CASE: Economic Exposure of Albion
Computers PLC
References and Suggested Readings

AS BUSINESS BECOMES increasingly global, more and more firms find it necessary to pay careful attention to foreign exchange exposure and to design and implement appropriate hedging strategies. Suppose, for example, that the U.S. dollar substantially depreciates against the Japanese yen, as it often has since the mideighties. This change in the exchange rate can have significant economic consequences for both U.S. and Japanese firms. For example, it can adversely affect the competitive position of Japanese car makers in the highly competitive U.S. market by forcing them to raise dollar prices of their cars by more than their U.S. competitors do. The same change in exchange rate, however, will tend to strengthen the competitive position of import-competing U.S. car makers. On the other hand, should the dollar appreciate against the yen, it would bolster the competitive position of Japanese car makers at the expense of U.S. makers. A real-world example of the effect of exchange rate changes is provided in the International Finance in Practice box on page 224, “U.S. Firms Feel the Pain of Peso’s Plunge.” The box explains how U.S. companies were adversely affected by the collapse of the Mexican peso during the period 1994–95.

Changes in exchange rates can affect not only firms that are directly engaged in international trade but also purely domestic firms. Consider, for example, a U.S. bicycle manufacturer that sources only domestic materials and sells exclusively in the U.S. market, with no foreign-currency receivables or payables in its accounting book. This seemingly purely domestic U.S. firm can be subject to foreign exchange exposure if it competes against imports, say, from a Taiwanese bicycle manufacturer. When the Taiwanese dollar depreciates against the U.S. dollar, this is likely to lead to a lower U.S. dollar price of Taiwanese bicycles, boosting their sales in the United States, thereby hurting the U.S. manufacturer.

Changes in exchange rates may affect not only the operating cash flows of a firm by altering its competitive position but also dollar (home currency) values of the firm’s assets and liabilities. Consider a U.S. firm that has borrowed Swiss francs. 222

Eun−Resnick: International
Financial Management,
Fourth Edition

III. Foreign Exchange
Exposure and Management

CHAPTER 9

9. Management of
Economic Exposure

© The McGraw−Hill
Companies, 2007

223

MANAGEMENT OF ECONOMIC EXPOSURE

Since the dollar amount needed to pay off the franc debt depends on the dollar/franc exchange rate, the U.S. firm can gain or lose as the Swiss franc depreciates or appreciates against the dollar. A classic example of the peril of facing currency exposure is provided by Laker Airways, a British firm founded by Sir Freddie Laker, which pioneered the concept of mass-marketed, low-fare air travel. The company heavily borrowed U.S. dollars to finance acquisitions of aircraft while it derived more than half of its revenue in sterling. As the dollar kept appreciating against the British pound (and most major currencies) throughout the first half of the 1980s, the burden of servicing the dollar debts became overwhelming for Laker...


References: Companies, 2007
223
exists between stock returns and the dollar’s value. Recent studies, such as Choi and
Prasad (1995), Simkins and Laux (1996), and Allayannis and Ofek (2001), also document that U.S
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