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Date Submitted: 10/16/2012 04:03 AM
WEEK 9
Management of Economic Exposure
Sebastian Bubrick Bessy Lin Wei Liu Chris Wijaya Gio Wu
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Management of Economic Exposure
[Objectives] • Understand the concept of Economic Exposure • Learn how to determine Economic Exposure • Learn ways to manage Economic Exposure
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Different Types of Currency Exposure
Currency Exposure
Transaction Exposure
Economic Exposure
Translation Exposure
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AGENDA
PART1.Textbook ‐ Ch9
I. Economic Exposure II. Asset Exposure III. Operating Exposure
PART2.Beyond the Textbook
I. Theoretical Foundation II. Empirical Study III. Current Practice
PART3.Case: Tiffany & Co.
I. II. III. IV. V. Case Background Problem identification Recommendation Analysis Regression
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Part 1. Textbook Outline
Economic Exposure Asset Exposure Operating Exposure
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Economic Exposure
News in China:
Central Bank increased the 1‐yr loan rate by 25 basis point in June, for the thirteenth time in 2 years. 95% of Chinese small firms suffered major losses, many went bankrupt. Many foreign investors gained higher profits.
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Economic Exposure
Currency Risk/Uncertainty Currency Exposure ≠
What is economic exposure? Who is subject to economic exposure? Most firms in today’s environment are affected
Economic Exposure
Definition: The extent to which the value of the firm would be affected by unanticipated changes in exchange rates. How sensitive the firm’s value is to the exchange rate.
Economic Exposure
Beta, Market Beta, Forex Beta
R(p)= r(f)+ b1*( r(m) ‐ r(f) )+ b2*( r(m) ‐ r(f) )+ b3*( r(m) ‐ r(f) )+…
Market Beta (CAPM):
measures the sensitivity to general market performance
Forex Beta:
measures the sensitivity to dollar exchange rate Positive Beta‐‐‐value up with $/£ value up Negative beta‐‐‐ value down as $/£ value down
Economic Exposure
Economic Exposure
China Canada
A C B
Economic Exposure
Two aspects of economic exposure...