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Economic Exposure
MEASURING AND MANAGING
ECONOMIC EXPOSURE
CHAPTER OVERVIEW
I. FOREIGN EXCHANGE RISK AND
ECONOMIC EXPOSURE
II. THE ECONOMIC CONSEQUENCES OF
EXCHANGE RATE CHANGES
III. IDENTIFYING ECONOMIC EXPOSURE
IV. CALCULATING ECONOMIC EXPOSURE
V. AN OPERATIONAL MEASURE OF
EXCHANGE RISK
VI. MANAGING OPERATING EXPOSURE
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Steps to the Creation of an Economic
Exposure Strategy
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FOREIGN EXCHANGE RISK AND
ECONOMIC EXPOSURE
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FOREIGN EXCHANGE RISK AND
ECONOMIC EXPOSURE
F. Implications
1. If nominal rates change with an
equal price change, no
alteration to cash flows.
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PART II
THE ECONOMIC CONSEQUENCES
OF EXCHANGE RATE CHANGES
I. Operating Exposure begins:
the moment a firm starts to invest in a
market subject to foreign competition
or in sourcing goods or inputs abroad
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THE ECONOMIC CONSEQUENCES OF
EXCHANGE RATE CHANGES
Step 3. Develop guidelines to create a
strategy
II. ECONOMIC CONSEQUENCES
A. The impact on Operating Exposure of
a real rate change depends upon:
Pricing flexibility and
1. Price elasticity of demand
2. Degree of product
differentiation
3. The Ability to shift production
and the substitution of inputs 9
THE ECONOMIC CONSEQUENCES OF
EXCHANGE RATE CHANGES
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If HC Appreciates
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If HC Appreciates
D. Product Differentiation
Price elasticity depends on degree of
differentiation
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FOREIGN EXCHANGE RISK AND
ECONOMIC EXPOSURE
F. SUMMARY
1. the economic impact of a
currency change depends on the
offset by the difference in inflation
rates or the change in real
exchange rates.
2. It is the relative price changes
that ultimately determine a firm’s
long-run exposure. 15
PART III
IDENTIFYING ECONOMIC
EXPOSURE
Step 4. List the new risks
I. Operating exposure begins with
New product development
A distribution network
Brand name development
Marketing to foreign markets
Foreign supply contracts
Overseas production facilities
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IDENTIFYING ECONOMIC
EXPOSURE
II. Key Questions to Identify Risk
A. Where is the company selling?
B. Who are the Company’s key
competitors?
C. How sensitive is demand to price?
D. Where is the company producing?
E. Where are the company’s inputs
coming from?
F. How are the company’s inputs and
outputs priced?
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PART IV
CALCULATING ECONOMIC
EXPOSURE
Step 5. Measure the economic exposure
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CALCULATING ECONOMIC
EXPOSURE
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PART V.
AN OPERATIONAL MEASURE OF
EXCHANGE RISK
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AN OPERATIONAL MEASURE OF
EXCHANGE RISK
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PART VI
MANAGING OPERATING EXPOSURE
I. INTRODUCTION
Step 6. Develop strategies to manage
economic exposure
Operating exposure management requires
long-term operating adjustments and the
involvement of ALL departments.
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MANAGING OPERATING EXPOSURE
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MANAGING OPERATING EXPOSURE
C. Product Strategy
exchange rate changes may alter:
1. The timing of new product
introductions,
2. Product deletion
3. Product innovations
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MANAGING OPERATING EXPOSURE
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MANAGING OPERATING EXPOSURE
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