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Chapter 10 Measuring Exposure to Exchange Rate Fluctuations Lecture Outline Is Exchange Rate Risk Relevant? Transaction Exposure Transaction Exposure to Net Cash Flows in Each Currency Measuring the Potential Impact of the Currency Exposure Assessing Transaction Exposure Based on Value-at-Risk Economic Exposure Economic Exposure to Local Currency Appreciation Economic Exposure to Local Currency Depreciation Economic Exposure of Domestic Firms Measuring Economic Exposure Translation Exposure Does Translation Exposure Matter? Determinants of Translation Exposure Examples of Translation Exposure 141 142 International Financial Management Chapter Theme This chapter distinguishes among three forms by which MNCs are exposed to exchange rate risk: (1) transaction exposure, (2) economic exposure, and (3) translation exposure. It should be emphasized that a firm sometimes benefits due to exposure. Yet, it typically would prefer to control its own destiny and therefore be insulated from exposure. Each firm differs in degree of exposure. A firm should be able to measure its degree of each type of exposure as described in this chapter. Then, it can decide how to cover that exposure using methods described in the following two chapters. Topics to Stimulate Class Discussion 1. Describe in general terms how you would measure the transaction exposure of a particular MNC. 2. What is the relationship between transaction exposure and economic exposure? 3. A small firm in New York City produces various metals and sells them to local manufacturers. It has no foreign sales and purchases all supplies and materials locally. Does transaction exposure exist for this firm? Does economic exposure exist for this firm? POINT/COUNTER-POINT: Should Investors Care about an MNCs Translation Exposure? ... View Full Document

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