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1、CHAPTER 9 Management of Economic ExposureHow to Measure Economic ExposureInternational Finance in Practice: U.S. Firms Feel the Pain of Pesos PlungeOperating Exposure: DefinitionIllustration of Operating ExposureDeterminants of Operating ExposureManaging Operating ExposureSelecting Low-Cost Producti
2、on SitesInternational Finance in Practice: The Strong Yen and Toyotas ChoiceFlexible Sourcing PolicyDiversification of the MarketR&D Efforts and Product DifferentiationFinancial HedgingInternational Finance in Practice: Porsche Powers Profit with Currency PlaysCASE APPLICATION: Exchange Risk Managem
3、ent at MerckSummaryMINI CASE: Economic Exposure of Albion Computers PLCHow to Measure Economic Exposure1 Suppose the U.S. dollar substantially depreciates against the Japanese yen. The change in exchange ratea) Can have a significant economic consequences for U.S. firms. b) Can have a significant ec
4、onomic consequences for Japanese firms. c) Can have a significant economic consequences for both U.S. and Japanese firms. d) None of the aboveAnswer: c)2 Suppose the U.S. dollar substantially depreciates against the Japanese yen. The change in exchange ratea) Will tend to weaken the competitive posi
5、tion of import-competing U.S. car makers. b) Will tend to strengthen the competitive position of import-competing U.S. car makers. c) Will tend to strengthen the competitive position of Japanese car makers at the expense of U.S. makers. d) None of the aboveAnswer: b)3 When the Mexican peso collapsed
6、 in 1994, declining by 37 percent,a) U.S. firms that exported to Mexico and priced in peso were adversely affected. b) U.S. firms that exported to Mexico and priced in dollars were adversely affected. c) U.S. firms were unaffected by the peso collapse, since Mexico is such a small market.d) Both a)
7、and b)Answer: d)Rationale: a) is obvious, the dollar value of revenue fell. Answer b) is less obvious, but those firms Mexican customers were less able to afford the imported goods.4 When exchange rates change,a) U.S. firms that sell only to domestic customers will be unaffected. b) U.S. firms that
8、sell only to domestic customers can be affected if they compete against imports. c) U.S. firms that sell only to domestic customers will be affected, but only if they borrow in foreign currency to finance their domestic operations. d) Both a) and b)Answer: b)5 When exchange rates change,a) This can
9、alter the operating cash flow of a domestic firm.b) This can alter the competitive position of a domestic firm.c) This can alter the home currency values of a multinational firms assets and liabilities.d) All of the aboveAnswer: d)6 Two recent studies have found a link between exchange rates and the
10、 stock prices of U.S. firms,a) This suggests that exchange rate changes can systematically affect the value of the firm by influencing its operating cash flows.b) This suggests that exchange rate changes can systematically affect the value of the firm by influencing the domestic currency values of i
11、ts assets and liabilities.c) a) and b)d) None of the above Answer: c)7 Economic exposure refers to:a) the sensitivity of realized domestic currency values of the firms contractual cash flows denominated in foreign currencies to unexpected exchange rate changesb) the extent to which the value of the
12、firm would be affected by unanticipated changes in exchange ratec) the potential that the firms consolidated financial statement can be affected by changes in exchange ratesd) ex post and ex ante currency exposuresAnswer: b) 8 It is conventional to classify foreign currency exposures into the follow
13、ing types:a) economic exposure, transaction exposure, and translation exposureb) economic exposure, noneconomic exposure, and political exposurec) national exposure, international exposure, and trade exposured) conversion exposure, and exchange exposureAnswer: a) 9 Exposure to currency risk can be m
14、easured by the sensitivities ofa) the future home currency values of the firms assets and liabilitiesb) the firms operating cash flows to random changes in exchange ratesc) a) and b)d) none of the aboveAnswer: c)10 Currency risk a) is the same as currency exposureb) represents random changes in exch
15、ange ratesc) measure “what the firm has at risk”d) a) and b)Answer: b)11 Suppose a U.S.-based MNC maintains a vacation home for employees in the British countryside and the local price of this property is always moving together with the pound price of the U.S. dollar. As a result,a) Whenever the pou
16、nd depreciates against the dollar, the local currency price of this property goes up by the same proportion.b) The firm is not exposed to currency risk even if the pound-dollar exchange rate fluctuates randomly.c) a) and b)d) none of the aboveAnswer: c)12 The exposure coefficient in the regression i
17、s given by:a)b)c) a) and b)d) eAnswer: a)13 The exposure coefficient in the regression is:a) A measure of how a change in the exchange rate affects the dollar value of a firms assets.b) Has a value of zero if the value of the firms assets is perfectly correlated with changes in the exchange ratec) a
18、) and b)d) none of the aboveAnswer: a)14 The link between the home currency value of a firms assets and liabilities and exchange rate fluctuations is:a) Asset exposureb) Operating exposurec) a) and b)d) none of the aboveAnswer: a)15 The link between a firms future operating cash flows and exchange r
19、ate fluctuations is:a) Asset exposureb) Operating exposurec) a) and b)d) none of the aboveAnswer: b)Operating Exposure: Definition16 Operating exposure can be defined as:a) the future home currency values of the firms assets and liabilitiesb) the extent to which the firms operating cash flows would
20、be affected by random changes in exchange ratesc) the sensitivity of realized domestic currency values of the firms contractual cash flows denominated in foreign currencies to unexpected exchange rate changesd) the potential that the firms consolidated financial statement can be affected by changes
21、in exchange ratesAnswer: b) 17 The variability of the dollar value of an asset (invested overseas) depends on:a) the variability of the dollar value of the asset that is related to random changes in the exchange rateb) the dollar value variability that is independent of exchange rate movementsc) a a
22、nd bd) none of the aboveAnswer: c)18 Consider a U.S. MNC who owns a foreign asset. If the foreign currency value of the asset is inversely related to changes in the dollar-foreign currency exchange rate:a) the company has a built-in hedgeb) the dollar value variability that is independent of exchang
23、e rate movementsc) a and bd) none of the aboveAnswer: c)USE THE FOLLOWING INFORMATION TO ANSWER THE NEXT FOUR QUESTIONS A U.S. firm holds an asset in Great Britain and faces the following scenario:State 1State 2State 3Probability 25%50%25%Spot rate $2.20/$2.00/$1.80/P*2,0002,5003,000P$4,400$5,000$5,
24、400 where, P* = Pound sterling price of the asset held by the U.S. firmP = dollar price of the same asset19 The expected value of the investment in U.S. dollars is:a) $4,950b) $3,700c) $2,112.50d) none of the aboveAnswer: b)Rationale:E(P) = 0.25 $4,400 + 0.50 $5,000 + 0.25 $5,400 = $4,95020 The vari
25、ance of the exchange rate is:a) 0.00200b) 0.10c) 0.01d) none of the aboveAnswer: a)Rationale:E(S) = 0.25 $2.20 + 0.50 $2.00 + 0.25 $1.80 = $.55 + $1 + $.45 = $2.00VAR(S) = 0.25($2.20 $2.00)2 + 0.50($2.00 $2.00)2 + 0.25($1.80 $2.00)2 = 0.001 + 0 + 0.001 = 0.002 21 The “exposure” (i.e. the regression
26、coefficient beta) is:Hint: Calculate the expression a) 25,000b) 25,000c) 25d) none of the aboveAnswer: a)Rationale: Cov(P,S) = 0.25($4,400 $4,950) ($2.20 $2.00) + 0.50 ($5,000 $4,950) ($2.00 $2.00) + 0.25($5,400 $4,950) ($1.80 $2.00)= 27.50 + 0 22.50= 50 b = 50/0.002 = 25,00022 Which of the followin
27、g conclusions are correct?a) most of the volatility of the dollar value of the British asset can be removed by hedging exchange risk because b2Var(S) and Var(e) are 236,717 ($)2 and 493,751 ($)2 respectivelyb) most of the volatility of the dollar value of the British asset can not be removed by hedg
28、ing exchange risk because b2Var(S) and Var(e) are 236,717 ($)2 and 493,751 ($)2 respectivelyc) most of the volatility of the dollar value of the British asset can NOT be removed by hedging exchange risk because b2Var(S) and Var(e) are 1,250,000 ($)2 and 1,122,500 ($)2 respectivelyd) most of the vola
29、tility of the dollar value of the British asset can be removed by hedging exchange risk because b2Var(S) and Var(e) are 1,250,000 ($)2 and 1,122,500 ($)2 respectivelyAnswer: c)Rationale:E(P) = 0.25 $4,400 + 0.50 $5,000 + 0.25 $5,400= $4,950Var(P) = 0.25($4,400 $4,950)2 + 0.50($5000 $4,950)2 + 0.25($
30、5,400 $4,950)2=75,625 + 1,250 + 50,625=127,500 ($)2 From the results to earlier questions we have the values:V(S) = 0.002 b = 25,000Therefore, using the Equation 9.2, we obtainV(P) = b2 Var(S) + Var(e)127,500= (25,000)2 0.002 + Var(e)Var(e)= 127,500 1,250,000= 1,122,500 ($)2 The expression “b2 Var(S
31、)” represents the volatility of the dollar value of the asset that is related to random changes in the exchange rate. The expression “Var(e)” is the volatility in the dollar value of the asset that is independent of exchange rate movements. Notice that theres a built in hedge in this example, when t
32、he exchange rate is down, the -denominated value of the asset is up and vice-versa.USE THE FOLLOWING INFORMATION TO ANSWER THE NEXT FOUR QUESTIONS A U.S. firm holds an asset in Israel and faces the following scenario:State 1State 2State 3Probability 25%50%25%Spot rate $0.30/IS$0.20/IS$0.15/ISP*IS2,0
33、00IS5,000IS3,000P$3,000$2,500$750 where, P* = Israeli shekel (IS) price of the asset held by the U.S. firmP = dollar price of the same asset23 The expected value of the investment in U.S. dollars is:a) $2,083.33b) $2,187.50c) $6,250.00d) $6,562.50Answer: b)Rationale:E(P) = 0.25 $3,000 + 0.50 $2,500
34、+ 0.25 $750= $2,187.5024 The variance of the exchange rate is:a) 0.001968b) 0.002968c) 0.003968d) 0.004968Answer: b)Rationale:E(S) = 0.25 $0.30 + 0.50 $0.20 + 0.25 $0.15 = $0.0750 + $0.1000 + $0.0375 = $0.2125VAR(S) = 0.25($0.30 $0.2125)2 + 0.50($0.20 $0.2125)2 + 0.25($0.15 $0.2125)2 = 0.001914 + 0.
35、000078 + 0.000976 = 0.002968 25 The “exposure” (i.e. the regression coefficient beta) is:Hint: Calculate the expression a) 128.98b) 1,289.80c) 12,898.00d) none of the aboveAnswer: c)Rationale: Cov(P,S) = 0.25($3,000.00 $2,187.50) ($0.30 $0.2125) + 0.50 ($2,500.00 $2,187.50) ($0.20 $0.2125) + 0.25($7
36、50.00 $2,187.50)($0.15 $0.2125)= 17.7734 1.9531 + 22.4609 = 38.2813 b = = 38.2813/0.002968 = 12,89826 Which of the following conclusions are correct?a) most of the volatility of the dollar value of the Israeli asset can be removed by hedging exchange risk because b2Var(S) and Var(e) are 236,717 ($)2
37、 and 493,751 ($)2 respectivelyb) most of the volatility of the dollar value of the Israeli asset can not be removed by hedging exchange risk because b2Var(S) and Var(e) are 236,717 ($)2 and 493,751 ($)2 respectivelyc) most of the volatility of the dollar value of the Israeli asset can not be removed
38、 by hedging exchange risk because b2Var(S) and Var(e) are 493,751 ($)2 and 236,717 ($)2, respectivelyd) most of the volatility of the dollar value of the Israeli asset can be removed by hedging exchange risk because b2Var(S) and Var(e) are 493,751 ($)2 and 236,717 ($)2 respectivelyAnswer: d)Rational
39、e:Var(P) = 0.25($3,000.00 $2,187.50)2 + 0.50($2,500.00 $2,187.50)2 + 0.25($750.00 $2,187.50)2=165,039 + 48,828 + 516,601=730,468 ($)2 From the results to earlier questions we have the values:V(S) = 0.002968 b = 12,898Therefore, using the Equation 9.2, we obtainV(P) = b2 Var(S) + Var(e)730,468 = (12,
40、898)2 0.002968 + Var(e)Var(e)= 730,468 493,751= 236,717 ($)2 The expression “b2 Var(S)” represents the volatility of the dollar value of the asset that is related to random changes in the exchange rate. The expression “Var(e)” is the volatility in the dollar value of the asset that is independent of
41、 exchange rate movements. Illustration of Operating Exposure27 Consider a U.S.-based MNC with a wholly-owned Italian subsidiary. Following a depreciation of the dollar against the euro, which of the following conclusions are correct?a) The cash flow in euro could be altered due an alteration in the
42、firms competitive position in the marketplace.b) A given operating cash flow in euro will be converted to a higher U.S. dollar cash flow.c) Answers a) and b)d) None of the aboveAnswer: c)28 Consider a U.S.-based MNC with a wholly-owned Italian subsidiary. Following a depreciation of the dollar again
43、st the euro, which of the following describes the competitive effect of the depreciation?a) The cash flow in euro could be altered due an alteration in the firms competitive position in the marketplace.b) A given operating cash flow in euro will be translated to a higher U.S. dollar cash flow.c) Ans
44、wers a) and b)d) None of the aboveAnswer: a)29 Consider a U.S.-based MNC with a wholly-owned German subsidiary. Following a depreciation of the dollar against the euro, which of the following describes the conversion effect of the depreciation?a) The cash flow in euro could be altered due an alterat
45、ion in the firms competitive position in the marketplace.b) A given operating cash flow in euro will be translated to a higher U.S. dollar cash flow.c) Answers a) and b)d) None of the aboveAnswer: b)30 Consider a U.S.-based MNC with a wholly-owned French subsidiary. Following a depreciation of the d
46、ollar against the euro, which of the following best describes the mechanism of any effect of the depreciation?a) The change in the cash flow in euro due an alteration in the firms competitive position in the marketplace is in part a function of the elasticity of demand for the firms product.b) A given operating cash flow in euro will be translated to a higher U.S. dollar cash flow regardless of the firms hedging program.c)
