Chapter 12 - Chapter 12 Operating Exposure This chapter...

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Chapter 12 1 Chapter 12: Operating Exposure This chapter examines the economic exposure of a firm over time, what we term operating exposure. Operating exposure measures any change in the present value of a firm resulting from changes in future operating cash flows caused by any unexpected change in exchange rates. Further, it measures the impact of changing exchange rates on a firm’s own operations over coming months and years and on its competitive position in relation to other firms. The goal is to identify strategic moves or operating techniques the firm might wish to adopt to enhance its value in the face of unexpected exchange rate changes. Operating exposure and transaction exposure are related in that they both deal with future cash flows. They differ in terms of which cash flows management considers and why those cash flows change when exchange rates change. We begin by revisiting the structure of Trident Corporation and how its structure dictates its likely operating exposure. The chapter continues with a series of strategies and structures used in the management of operating exposure. 12. 1 Trident Corporation: A Multinational’s Operating Exposure The structure and operations of a multinational company determine the nature of its operating exposure. Trident C orporation’s basic structure and currencies of operation are described in Exhibit 1. As a U.S.-based publicly traded company, all financial metrics and values have to be consolidated and expressed in U.S. dollars. Further, the functional currencies of the individual subsidiaries in combination determine the overall operating exposure of the firm in total. The net operating cash flow of any individual business reflects the cash inflows and cash outflows of its competitive position in the market: Net operating cash flow = Accounts receivable over time Accounts payable over time
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Chapter 12 2 Exhibit 1: Trident Corporation: Structure and Operations 12.1.1 Static versus Dynamic Operating Exposure Measuring the operating exposure of a firm like Trident requires forecasting and analyzing all the firm’s future individual transaction exposures together with the future exposures of all the firm’s competitors and potential competitors worldwide. Exchange rate changes in the short term affect current and immediate contracts, generally termed transactions. However, over the longer term, as prices change and competitors react, the more fundamental economic and competitive drivers of the business may alter all cash flows of all units. 12.1.2 Operating and Financing Cash Flows The cash flows of a typical firm can be divided into operating cash flows and financing cash flows . Operating cash flows arise from intercompany (between unrelated companies) and
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Chapter 12 3 intracompany (between units of the same company) receivables and payables, rent and lease payments for the use of facilities and equipment, royalty and license fees for the use of technology and intellectual property, and assorted management fees for serves provided.
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