How To Manage Operating Exposure And Exchange Risk
Introduction
An asset in California is concerned in this case study and its value is depending on the development of American economy in the future. Specifically, if the American economy enjoys prosperity in the coming years, this asset will be valued as high as 1.2 million dollars while one dollar equals half a British pound in value; however, if the American economy suffers recession, this asset may be valued as low as 0.8 million dollars while one dollar equals 0.625 British pound. According to the predictions, American economy will enjoy prosperity at a probability of 60%, otherwise it will suffer recession. In order to mitigate the operating and currency risk as much as possible, some measures must be taken to manage economic and operating exposure. Thus, the main body of this case study is divided into three parts. First, the currency exposure to be faced with is clarified as well as potential financial loss. Second, the available strategies in managing the operating and currency exposure are listed and the final choice is decided. Last, but not the least, all the potential strategies for managing the operating and currency exposure are critically evaluated to justify the final choice. Thus, this case study has delivered a comprehensive and coherent idea in economic and operating risk management.
Findings
Currency exposure and potential financial loss
Under the condition that this asset is sold out and settled in British pound in the future, the actual income might vary a lot in amount depending on the development of American economy. The expected income on the assumption that American economy enjoys prosperity in the coming years (60 percent probability of the booming economy in America) is 600,000 pounds and the calculation is as follow:
At the next step, the expected income on the assumption that American economy suffers recession in the coming years (40 percent probability of the economy downturn in America) is 500,000 pounds and the calculation is
An asset in California is concerned in this case study and its value is depending on the development of American economy in the future. Specifically, if the American economy enjoys prosperity in the coming years, this asset will be valued as high as 1.2 million dollars while one dollar equals half a British pound in value; however, if the American economy suffers recession, this asset may be valued as low as 0.8 million dollars while one dollar equals 0.625 British pound. According to the predictions, American economy will enjoy prosperity at a probability of 60%, otherwise it will suffer recession. In order to mitigate the operating and currency risk as much as possible, some measures must be taken to manage economic and operating exposure. Thus, the main body of this case study is divided into three parts. First, the currency exposure to be faced with is clarified as well as potential financial loss. Second, the available strategies in managing the operating and currency exposure are listed and the final choice is decided. Last, but not the least, all the potential strategies for managing the operating and currency exposure are critically evaluated to justify the final choice. Thus, this case study has delivered a comprehensive and coherent idea in economic and operating risk management.
Findings
Currency exposure and potential financial loss
Under the condition that this asset is sold out and settled in British pound in the future, the actual income might vary a lot in amount depending on the development of American economy. The expected income on the assumption that American economy enjoys prosperity in the coming years (60 percent probability of the booming economy in America) is 600,000 pounds and the calculation is as follow:
At the next step, the expected income on the assumption that American economy suffers recession in the coming years (40 percent probability of the economy downturn in America) is 500,000 pounds and the calculation is
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