Chapter 10 Notes - Chapter 10 Operating Exposure Operating...

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Chapter 10: Operating Exposure Operating exposure (Economic Exposure, Competitive exposure, or Strategic exposure): Change in present value of firm due to effects on its operations caused by unexpected exchange rate changes - Change in sales, price, or costs - Change in competition in domestic and foreign markets - Change in financing opportunities Measurement, analysis, and management of operating exposure is far more important to maintain long-run viability of firm and for the long-run health of a business than changes caused by transaction or translation exposure. Analysis of future exposure of all firm’s competitors and potential competitors worldwide is important as well ---------------------------------------------------------------------------------------------------------- Operating and Financial Cash Flows: Operating exposure can arise from both inter -company cash flows (between unrelated companies) and intra -company cash flows (between unites of the same company) o o financial cash flows: Loan principal and interest, dividends, change in value of capital, principal & interest payments ---------------------------------------------------------------------------------------------------------- Operating vs. Transaction Exposure: Operating exposure: Effect of exchange rates on dollar value of anticipated uncontracted foreign currency cash flows. Operating exposure deals with changes in long-term cash flows that have not been contracted for but would be expected in the normal course of future business. One might view operating exposure as “anticipated future transactions exposure,” although the concept is broader because the impact of the exposure might be through sales volume or operating cost changes. Transaction Exposure: Effect of exchange rates on dollar value of contracted foreign currency cash flows. Transaction exposure deals with changes in near-term cash flows that have already been contracted for (such as foreign currency accounts receivable, accounts payable and other debts).
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Similar: in that they both deal with future cash flows Different: which cash flows management considers and why those cash flows change when exchange rate change For example, Jefferson’s Airplanes has a contract to build a plant in Belgium one year from now. It has exposure to the USD/€ exchange rate. The exposure relating to the effect on its €1 M investment to build the plant is transaction
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Chapter 10 Notes - Chapter 10 Operating Exposure Operating...

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