Foreign Exchange Exposure

Foreign Exchange Exposure - Foreign Exchange Exposure What...

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Foreign Exchange Exposure What is it and How it Affects the Multinational Firm?
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What is Foreign Exchange Exposure? Simply put, foreign exchange exposure is the risk associated with activities that involve a global firm in currencies other than its home currency. Essentially, it is the risk that a foreign currency may move in a direction which is financially detrimental to the global firm. Given our observed potential for adverse exchange rate movements, firms must: Assess and Manage their foreign exchange exposures.
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Does Foreign Exchange Exposure Matter? What do Global Firms Say Nike: “Our international operations and sources of supply are subject to the usual risks of doing business abroad, such as possible revaluation of currencies…” (2005). Starbucks: “In fiscal 2004, international company revenue [in US dollars] increased 32%, [in part] because of the weakening U.S. dollar against both the Canadian dollar and the British pound.” (2005). McDonalds: “In 2000, the weak euro, British pound and Australian dollar had a negative impact upon reported [US dollar] results.” (2000).
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4 FX Exposure and the Valuation of a MNC where E ( CF $, t ) represents expected cash flows to be received at the end of period t, n represents the number of periods into the future in which cash flows are received, and k represents the required rate of return by investors. ( 29 [ ] ( 29 = + = n t t t k CF E V 1 $, 1
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Impact of Foreign Exchange Exposure where CFj,t represents the amount of cash flow denominated in a particular foreign currency j at the end of period t, Sj,t represents the exchange rate at which the foreign currency (measured in dollars per unit of the foreign currency) can be converted to dollars at the end of period t . ( 29
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This note was uploaded on 12/08/2011 for the course FSNA 415 taught by Professor Chengruhu during the Fall '11 term at SUNY Canton.

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Foreign Exchange Exposure - Foreign Exchange Exposure What...

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