Week8 Tutorial Solutions

Week8 Tutorial Solutions - Kirt C. Butler, Solutions for...

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Kirt C. Butler, Solutions for Multinational Finance , 4 th edition 40 Chapter 11 Managing Operating Exposure to Currency Risk Answers to Conceptual Questions 11.1 What is operating exposure to currency risk, and why is it important? A f i r m h a s o p e r a t i n g e x p o s u r e t o c u r r e n c y r i s k when the value of its nonmonetary (real) cash flows changes with unexpected changes in currency values. 11.2 In a discounted cash flow framework, in what ways can operating risk affect the value of the multinational corporation? O p e r a t i n g e x p o s u r e ( i n d e e d , c u r r e n c y e x p o s u r e g e nerally) affects value either through the cash flows or the discount rate in the valuation equation V d = Ȉ t E[CF t d ]/(1+i d ) t . 11.3 What is an integrated market? a segmented market? Why is this distinction important in multinational financial management? P u r c h a s i n g p o w e r p a r i t y h o l d s i n a n i n t e g r a t e d market for goods, services, or financial assets. This means that equivalent assets trade for the same price. A market is segmented if purchasing power parity does not hold. Companies operating in segmented markets have prices that are locally determined. Companies operating in integrated markets face prices that are globally determined. 11.4 State how each of the following companies are affected by a real depreciation of the domestic currency: a) an importer, b) an exporter, c) a diversified multinational corporation competing in globally competitive goods and financial markets. a) The classic exporter faces costs that are locally determined in segmented markets and revenues that are globally determined in integrated markets, resulting in a positive exposure to the foreign currency. b) The classic importer buys goods in integrated global markets and sell them in segmented local markets, resulting in a negative exposure to foreign currency values. A real depreciation of the foreign currency hurts the exporter and helps the importer. c) Multinational corporations operating in integrated global input and output markets have foreign currency exposures in both revenues and costs. The net exposure of the multinational corporation depends on the balance between its import and export activities. 11.5 What is meant by the statement “Exposure is a regression coefficient?” E x p o s u r e i s m e a s u r e d b y t h e s l o p e c o e f f i c i e n t i n t h e r e g r e s s i o n r t d = Į d + ȕ f s t d/f + e t d . The regression coefficient ȕ
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Week8 Tutorial Solutions - Kirt C. Butler, Solutions for...

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