Chapter 12 Notes

Chapter 12 Notes - Chapter 12 Operating Exposure Questions...

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Unformatted text preview: Chapter 12 Operating Exposure Questions 12-1. By Any Other Name. Operating exposure has other names. What are they, and what do the words in these names suggest about the nature of operating exposure? Economic exposure emphasizes that the exposure is created by the economic consequences of an unexpected exchange rate change. Economic consequences, in turn, suggests that the impact is due to the response of external forces in the economy, rather than, say, something directly under the control of management. Competitive exposure suggests that the consequences of an unexpected exchange rate change are due to a shift in the competitive position of a firm, vis--vis its competitors. Strategic exposure suggests that matters of long-range cost changes and price setting, needed to anticipate or adjust to an unexpected change in exchange rates, are matters of corporate strategy; i.e., how the company positions itself in anticipation of risks caused by exchange rate changes. 12-2. Exposure Type Comparison. From a cash flow measurement perspective, what is the major difference between losses from transaction exposure and from operating exposure? Both exposures deal with changes in expected 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). 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. Given a known exchange rate change, the cash flow impact of transaction exposure can be measured precisely whereas the cash flow impact of operating exposure remains a conjecture about the future. 12-3. Intracompany Cash Flows. What are the differences between operating cash flows and financial cash flows from parent to subsidiary or vice versa? List several cash flows in both categories and indicate why that flow takes place. Operating cash flows . These flows arise from normal business (production, marketing, selling) between parent and subsidiary. a. Payment for goods and services. Parents and subsidiaries frequently buy and sell components and/or services from each other as a matter of seeking the most cost efficient way of doing business. b. Rent and lease payments. Parents and subsidiaries often use each others physical facilities. Examples of rented or leased physical assets range from factory buildings to corporate 51 Eiteman/Stonehill/Moffett Multinational Business Finance, Twelfth Edition aircraft. Decisions on ownership vs. renting from a related company may be based on the search for efficiency, on tax laws, or on the historical evolution of the multinational firm....
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This note was uploaded on 12/06/2011 for the course FIN 536 taught by Professor Staff during the Fall '11 term at S.F. State.

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Chapter 12 Notes - Chapter 12 Operating Exposure Questions...

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