If a currency is depreciating, give incentives to customers who owe you in that currency to pay early; pay your obligations denominated in that currency as late as your contracts will allow.Hedging via Exposure Netting:A multinational firm should not consider deals in isolation, but should focus on hedging the firm as a portfolio of currency positions. In other words, if the firm has a portfolio of currency positions, it makessense to hedge residual exposure, rather than hedge each currency position separately.Many multinational firms use a reinvoice center. Which is a financial subsidiary that nets out the intrafirm transactions. Once the residual exposure is determined, then the firm implements hedging.(EX: For instance, a Canadian firm may have an account payable in euros and, at the same time, an account receivable in Swiss francs. Considering that the euro and Swiss franc move against the dollar almost in lockstep, the firm can just wait until these accounts become due and then buy euros spot with Swiss francs. It can be wasteful and unnecessary to buy euros forward and sell Swiss francs forward.) Chapter 9 – 1. Measuring economic exposure Exposure to currency risk thus can be properly measured by the sensitivities of 1) the future currency values of the firm's assets and liabilities and 2) the firm's operating cash flows to random changes in the Exchange rates. example: asset exposure P= a + b × S + e a= regression constant b= regression coefficient S= Exchange Rate e= random error P= dollar value of an asset if b = 0 the dollar value (P) of the asset is independent of exchange rate movements, implying no exposure. so, exposure is the regression coefficient (b) Exposure coefficient:
1. Competitive effect and conversion effect pg.231-233If a U.S. computer company owns a British subsidiary, that manufactures and sells personal computers in the U.K market with exception of imported input from the U.S. the Firm may be exposed to operational risk (operational exposure) because if there is a depreciation of the pound it could affect the projected dollar operating cash flow of British computers in the following ways:1.The competitive effect: a pound depreciation may affect operating cash flows in pounds by altering the firm's
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