Economic exposure
Sponsored Links
This presentation is the property of its rightful owner.
1 / 20

Economic Exposure PowerPoint PPT Presentation


  • 54 Views
  • Uploaded on
  • Presentation posted in: General

Economic Exposure. Changes in the exchange rate can affect the competitiveness of both MNCs and purely “domestic” businesses. How Changing FX Rates can Affect Firm Value.

Download Presentation

Economic Exposure

An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.


- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -

Presentation Transcript


Economic Exposure

Changes in the exchange rate can affect the competitiveness of both MNCs and purely “domestic” businesses.


How Changing FX Rates can Affect Firm Value


This study measures industry stock market performance against over-all market performance and the US$ fx rate for USA firms.


Statistical Review

* We are going to want to measure the sensitivity of business performance to changes in the exchange rate.

* These coefficients are also known as “betas”.


Asset Exposure (acct. receivable)


Example of Economic (Asset Exposure)

Case 1: When UK£ gets stronger, internationally, local UK£ prices go up.

Case 2: When UK£ gets stronger, internationally, local UK£ prices go fall.

Case 3: When UK£ gets stronger, internationally, local UK£ prices stay same.


Example (cont.): How the Betas Were Calculated.


Imperfect Forward Hedging

  • Only when there is no local price risk (Case 3) is perfect forward hedging possible.

  • To continue with example

    • Assume forward rate F( ) is $1.50/£.

    • Sell £ forward: contract size equal to beta (Case 1: £1,700; Case 3: £1,000).

    • Win/Lose forward contract size x $(F – S).


Example (cont.): Imperfect Benefits of Forward Hedge

Only when FX risk is the ONLY risk can a currency hedge reduce ALL the risk!


Operating Exposure


Operating Exposure: Example

  • USA computer company with UK subsidiary “Albion”.

  • Albion makes and sells computers in the UK.

  • Albion imports computer chips from Intel (USA) for $512 (currently £320, part of variable costs).

  • Current sport rate $1.60/£.

  • Tax rate in UK = 50%.


Current Projections for Albion Computers


Example (cont.)

  • Now, suppose sterling falls in value from $1.60/£ to $1.40/£. (*Computer chips now cost £366 each).

  • Competitive Effect: Weaker pound may effect Albion’s competitive position.

  • Conversion Effect: A given £ cash flow will be worth less in $ to the USA parent .


Example (cont.): CASE 1. Nothing changes except the price of the imported computer chips.

* Albion is assumed NOT to be able to raise prices due to UK competition.


Example (cont.): CASE 2. Albion is able to raise the price of its computers in response to the increase in the price of the imported computer chips.


Example (cont.): CASE 3. Albion is able to raise the price of its computers in response to the increase in the price of the imported computer chips and local input prices, but loses some customers.


Example (cont.): Summary of the Three Cases


Determinants of Operating Exposure


Managing Operating Exposure


  • Login