Managing Economic Exposure and Translation Exposure

STUDY UNIT 12

MANAGING ECONOMIC EXPOSURE AND TRANSLATION EXPOSURE

LEARNING OUTCOMES

On completion of this study unit, you should be able to

■ explain how an MNC can hedge its economic exposure

■ explain the importance of managing economic exposure

■ explain how economic exposure can be reduced through restructuring

■ explain how an MNC can hedge its translation exposure

■ explain the limitations of hedging translation exposure

■ discuss how managing economic exposure impacts on an MNC's value

12.1 OVERVIEW OF THE UNIT

Even after hedging all transaction exposure, the operating cash flows of MNCs may still be

sensitive to fluctuations in exchange rates. In addition, the consolidated financial statements

of the parent MNCs are subject to translation exposure because of various conventions in

translating foreign currency assets and liabilities.

Chapter 12 of the prescribed text is your required reading. In order to achieve the

learning outcomes of this study unit, you are required to read through the following four subheadings of the chapter:

Economic exposure

A case study in hedging economic exposure

Hedging exposure to fixed assets

Managing translation exposure

12.2

ACTIVITIES

Self-test

Do the self-test questions for chapter 12.

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Answers to the self-test questions are provided at the end of the prescribed

textbook.

Case Study: Assessment of Economic Exposure

Study the case "Blades, PLC: Assessment of Economic Exposure" and answer the questions

that follow it.

Suggested answers are provided below:

1. If the Thai customer renews its commitment for another three years, the price Blades

receives in baht would continue to be fixed. Conversely, Blades’ cost of goods sold

incurred in Thailand would be subject to the high level of inflation in Thailand. In

addition, the high inflation may cause the baht to depreciate, which would reduce the

dollars received from baht-denominated sales to Thailand.

2. Before renewing its...