Operating Exposure

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...