Chapter 09. answer - End-of-Chapter Question Solutions 1 _...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
End-of-Chapter Question Solutions ____________________________________________________________________________________________ 1 C HAPTER 9: O PERATING E XPOSURE 1. Definitions. Define the following terms: 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-á-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. 2. Operating versus transaction exposure. Explain the difference between operating exposure and transaction 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. 3. Unexpected exchange rate changes; a. Why do unexpected exchange rate changes contribute to operating exposure, but expected exchange rate changes do not? An expected change in foreign exchange rates is not included in the definition of operating exposure, because both management and investors should have factored this information into their evaluation of anticipated operating results and market value. From a management perspective, budgeted financial statements already reflect information about the effect of an expected change in exchange rates. For example, under equilibrium conditions the forward rate might be used as an unbiased predictor of the future spot rate. In such a case management would use the forward rate when preparing the operating budgets, rather than assume the spot rate would remain unchanged.
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 03/12/2012 for the course FINANCE 5080 taught by Professor C during the Fall '10 term at University of Houston.

Page1 / 7

Chapter 09. answer - End-of-Chapter Question Solutions 1 _...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online