12 3 Macroeconomic Uncertainty Explain how the concept of macroeconomic

12 3 macroeconomic uncertainty explain how the

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12-3. Macroeconomic Uncertainty. Explain how the concept of macroeconomic uncertainty expands the scope of analyzing operating exposure. Macroeconomic uncertainty is the sensitivity of the firm’s future cash flows to macroeconomic variables in addition to foreign exchange, such as changes in interest rates and inflation rates. 12-4. Strategic Response. The objective of both operating and transaction exposure management is to anticipate and influence the effect of unexpected changes in exchange rates on a firm’s future cash flows. What strategic alternative policies exist to enable management to manage these exposures?
Eiteman/Stonehill/Moffett • Multinational Business Finance, Thirteenth Edition 52The key to effective preparations for an unexpected devaluation is anticipation. Major changes to protect a firm after an unexpected devaluation are minimally effective. Possibilities include diversifying operations and diversifying financing. 12-5. Managing Operating Exposure.The key to managing operating exposure at the strategic level is for management to recognize a disequilibrium in parity conditions when it occurs, and to be prepositioned to react most appropriately. How can this task best be accomplished? If a firm’s operations are diversified internationally, management is pre-positioned both to recognize disequilibrium when it occurs, and to react competitively. Consider the case in which purchasing power parity is temporarily in disequilibrium. Although the disequilibrium may have been unpredictable, management can often recognize its symptoms as soon as they occur. For example, management might notice a change in comparative costs in the firm’s own plants located in different countries. It might also observe changed profit margins or sales volume in one area compared to another, depending on price and income elasticities of demand, and competitors’ reactions. Recognizing a temporary change in worldwide competitive conditions permits management to make changes in operating strategies. Management might make marginal shifts in sourcing raw materials, components, or finished products. If spare capacity exists, production runs can be lengthened in one country and reduced in another. The marketing effort can be strengthened in export markets where the firm’s products have become more price competitive because of the disequilibrium condition.

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