TRANSACTION EXPOSURE operating exposure and translation exposure. Multinational Business Finance [email protected] 0. Transaction Exposure. Foreign exchange exposure is a measure of
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how a firm’sprofitability, net cash flow, and market valuewill change because of a change in exchange rates.
The cost of hedging needs to be taken into account!
Net exposure of the firm with put option
U.S. Dollar market
Trident´s weighted average cost of capital =12% (3% for 30 days)
US 3 month borrowing rate=8% (2% for 90 days)
US 3 month investment rate 6% (1,5% for 90 days)
Sales=$1764000 90 days Account receivable 100000£.
Spot rate =$1,7640/£ F90 =$1,7540
S90 =1,7600 (forcasted by the advisor)
British pound market
UK 3 month borrowing rate=10% (2,5% for 90 days)
UK 3 month investment rate 8% (2% for 90 days)
June (3 month) put option for £1000000 with a strike price of $1,75/£, premium is 1,5%.
What is the dollar amount of the 1M£ sales in 3 month time?
Call option used to hedge the payable.
Operating exposure (also called competitive exposure, and strategic exposure) measuresthe change in the firm´s present value resulting from the expected changes in future operating cash flows denominated in foreign currency (caused by an unexpected change in exchange rates!).
Note: All the expected exchange rate changes should be already incorporated in the financial plan, thus should not influence the firm value.
Differentiating cash flows of MNEs:
Example: a US firm has a continuing export sales to Canada.
Ford agrees to pay all purchases in Japanese Yen to Mazda as long as the spot exchange rate on the day of invoice is between 115 yen/$ to 125 yen/$. If however the exchange rate falls out of this range, Mazda and Ford will share the difference equally.
What happens if the rate falls to 110 yen/$?