12 Chapter Twelve. Management of Economic Exposure. Chapter Objective: This chapter provides a way to measure economic exposure, discusses its determinants, and presents methods for managing and hedging economic exposure. Chapter Outline Three Types of Exposure
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Chapter TwelveManagement of Economic Exposure
Operating exposureChannels of Economic Exposure
Home currency value of assets and liabilities
Exchange rate fluctuations
Future operating cash flows
P = a + bS + e
a is the regression constant
e is the random error term with mean zero.
Where Cov(P,S) is the covariance between the dollar value of the asset and the exchange rate, and Var(S) is the variance of the exchange rate.
The exposure coefficient, b, is defined as follows:
Example: A Canadian company operates a French subsidiary that assemble and sells computers throughout Europe. The French sub imports Intel microprocessors from US. A depreciating Euro will have two effects:
1. Competitive Effect: A euro depreciation may affect OCF in Euros by altering the firm’s competitive position in the marketplace.
2. The conversion Effect: A given OCFs in Euros will be converted into a lower dollar amount after depreciation
a) selling the same product in more than one country, and
b) selling several different product lines in more than one foreign market.