Financial

International Corporate Finance

11th Edition

by Jeff Madura

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12

Managing Economic Exposure and Translation Exposure

Chapter Objectives

Explain how an MNC’s economic exposure can be

hedged

Explain how an MNC’s translation exposure can be

hedged

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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Managing Economic Exposure

Economic exposure represents the impact of

exchange rate fluctuations on a firm’s future cash

flows. (Exhibit 12.1)

Assessing economic exposure

An MNC must measure its exposure to each

currency in terms of its cash inflows and cash

outflows. (Exhibit 12.2)

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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Managing Economic Exposure

Restructuring to reduce economic exposure, e.g.:

a.Increase sensitivity of revenues to exchange rate

movements.

b.Decrease sensitivity of expenses to exchange rate

movements. (Exhibit 12.3 & 12.4)

Expediting the Analysis with Computer Spreadsheets

Determining the sensitivity of cash flows (ignoring

tax effects) to alternative exchange rate scenarios

can be expedited by using a computer to create a

spreadsheet similar to Exhibit 12.3.

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© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as

permitted in a...