Chapter 10 - Chapter10 OperatingExposure OperatingExposure

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Chapter 10 Operating Exposure
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Operating Exposure Operating exposure: Change in 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 foreign markets - change in competition in domestic markets - change in financing opportunities Measurement, analysis and management of operating  exposure needed to maintain long-run viability of firm Analysis of exposure of firm’s competitors and potential  competitors important as well Operating exposure can arise from both  inter -company  cash  flows and  intra -company cash flows
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Operating vs. Transaction  Exposure  Transaction Exposure: Effect of exchange rates on dollar value  of  contracted  foreign currency cash flows Operating Exposure: Effect of exchange rates on  anticipated uncontracted  foreign currency cash flows royalty & license fees - financial cash flows: dividends, change in value of capital,  e.g. 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 exposure .  The effect on the costs of and 
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Effects of Unexpected Changes Expected changes in exchange rate are not included in  operating  exposure because this is factored into projections and 
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This note was uploaded on 01/25/2011 for the course FIN 320 taught by Professor Mercury during the Fall '10 term at Central Connecticut State University.

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Chapter 10 - Chapter10 OperatingExposure OperatingExposure

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