Assignment 3 - F I N 535 November 20th, 2010 Assignment 3...

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Unformatted text preview: F I N 535 November 20th, 2010 Assignment 3 Binal Khetani Strayer University 2 International Financial Management I ntroduction Economic exposure plays a very important role in regards to cash flows of MNCs. Hedging an economic exposure can be very difficult but could turn out to be a profitable venture for MNCs. Exchange rate fluctuates every day and economic exposure can highly impact the firm’s cash flows. Changes in the exchange rates will affect the demand of the products due to transaction exposure which will in turn affect the economic exposure. MNCs should effectively manage it economic exposure in order to stabilize its earnings and improve cash flows. This will not only reduce the risk and the cost of capitol but also increase the value of the firm. Firm’s sales are very sensitive to exchange rates and hence MNCs should assess the exposure of each currency in terms of its inflows and outflows of cash. Many MNCs end up shifting the sources of its costs or revenue to other locations in order to match its cash inflow and outflows in foreign countries. This is often done to reduce the cost of materials and increase sales. The production and the marketing facilities in different countries can be increased to reduce costs and the negative effect of economic exposure. I t is also important to understand the degree of economic exposure in order to establish a strategy to manage the exposure. A company can use various strategies like the pricing policy, hedging with forward contracts, purchasing foreign supplies, financing with foreign funds and revising operations of other units. All these strategies may be used to reduce the adverse effect of economic exposure but if the foreign competition increases then the sensitivity of cash flows to exchange rate will increase as well. Assignment 3 Vogl Company is a U.S. firm conducting a financial plan for the next year. I t has no foreign subsidiaries, but more than half of its sales are from exports. I ts foreign cash inflows to be received from exporting and cash outflows to be paid for imported supplies over the next year are shown in the following table: Currency Total Inflow...
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This note was uploaded on 02/22/2011 for the course FIN 535 taught by Professor Edward during the Spring '11 term at Chaminade University.

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Assignment 3 - F I N 535 November 20th, 2010 Assignment 3...

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