Managing Economic and Transaction Exposure

Managing Economic and Transaction Exposure - Managing...

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Managing Economic and Transaction Exposure GLOBAL FINANCE FIN/403 February 2, 2009 Introduction
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Any business venture into a foreign nation will require consideration into the risks and opportunities with regard to exchange rates. The expansion plans of Rest Easy hotels is no different in this regard. Significant planning and consideration must go into the effects on operations that currency fluctuations may have on this plan. Without a real world knowledge of the risks and the methods by which these risks can be mitigated a firm’s plans for expansion may be doomed before they even begin. Initial Planning Stages The firm has purchased the properties it needs for it’s initial expansion into it’s neighboring nation Zenobia. It now has the option to pay back the loans for that property either in it’s own currency or the native currency in Zenobia. The firm will pay back the debts in four quarterly payments and would like to make the payments in both the domestic dollars and the Zenobian pounds rather than completely in one currency. The current consensus view by economists is that the pound will devalue against the dollar by 1.75 to 2.00 percent over the next year. With this estimation it makes good financial sense to pay about sixty percent of the payments with the pound as the payments in that currency will be less expensive for the firm. However, the firm would not want to go too far in their estimations and make a larger portion of the payments in pounds as this would open them up to significant risk if the pound does
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