Professional Documents
Culture Documents
10
Measuring Exposure To
Exchange Rate Fluctuations
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Is Exchange Rate Risk Relevant?
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Is Exchange Rate Risk Relevant?
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Is Exchange Rate Risk Relevant?
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Is Exchange Rate Risk Relevant?
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Is Exchange Rate Risk Relevant?
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Types of Exposure
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Transaction Exposure
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Economic Exposure
Firm’s imported
supplies denominated No Change No Change
in local currency
Firm’s imported
supplies denominated Decrease Increase
in foreign currency
Interest owed on
foreign funds Decrease Increase
borrowed
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Economic Exposure
PCFt = a0 + a1et + µ t
PCFt = % change in inflation-
adjusted cash flows measured in the
firm’s home currency over period t
et = % change in the currency
exchange rate over period t
µt = random error term
a0 = intercept
a1 = slope coefficient
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Economic Exposure
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Translation Exposure
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Translation Exposure
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Translation Exposure
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Translation Exposure
m
n ∑
[
E ( CFj , t ) × E (ER j , t ) ]
j =1
Value = ∑
t =1 ( 1 + k ) t
E (CFj,t ) = expected cash flows in
currency j to be received by the U.S. parent at the
end of period t
E (ERj,t ) = expected exchange rate at
which currency j can be converted to dollars at
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Chapter Review
• Transaction Exposure
¤ Transaction Exposure to “Net” Cash Flows
¤ Transaction Exposure Based on Currency
Variability
¤ Transaction Exposure Based on Currency
Correlations
¤ Transaction Exposure Based on Value-at-
Risk
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Chapter Review
• Economic Exposure
¤ Economic Exposure to Local Currency
Appreciation & Depreciation
¤ Economic Exposure of Domestic Firms &
MNCs
¤ Measuring Economic Exposure
- Sensitivity of Earnings & Cash Flows to
Exchange Rates
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Chapter Review
• Translation Exposure
¤ Does Translation Exposure Matter?
- Cash Flow Perspective
- Stock Price Perspective
¤ Determinants of Translation Exposure
¤ Examples of Translation Exposure
• Impact of Exchange Rate Exposure on an
MNC’s Value
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