Strategies for exposure management


Exposure management strategies must address TWO ques ..
1) What is our corporate attitude towards risk? 2) How much cash are willing to spend to protect against unrealised translation loss?


Strategy for managing exposure
‡ A company can take either an aggressive or defensive approach. ‡ These losses don¶t appear in the financial statement but affect in the reduction of the economic returns of the company


Strategies for exposure management
Aggressive approach ‡ The aggressive exporter would try to invoice the sale in what he expected to be a hard currency (relative to his own currency) Defensive approach ‡ The defensive firm would try to invoice the export sale in its home currency


Need for For-Ex Rate Projection
‡ 1.Hedging Decision:- A firm in the U.S that plans to pay for Gems imported from India in 90 Days. If the forecasted value of the Indian rupee in 90 days is sufficiently below the 90-day forward rate, the MNC may not decide to hedge.


2.Short Term Financing Decision:- when large corporations borrow, they have access to several different currencies .The currency they borrow will ideally:1) a low interest rate. 2)weaken in value over the financing period.


3.Short term investment decision:Corporations sometimes have an excess amount of cash available for a short term The ideal currency for deposit would:1) A high interest rate. 2) Strengthen in value over the investment period.


4.Capital Budgeting Decision:- When an MNC attempts to determine whether to establish a subsidiary in a given country, a capital budgeting analysis is conducted. Forecasts of the future cash flow used within the capital budgeting process will be dependent on future currency values


5. Long term financing decision
‡ Corporations that issue bonds to secure long term funds may consider denominating the bonds in foreign currencies


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