Slide #1:

Chapter VII - Measuring exposure to exchange rate flactuations

Slide #2:
A. Exchange Rate Risk Relevance
•refers to the risk that a company's operations and profitability may be affected by changes in
the exchange rates between currencies.

Slide #3:
Purchasing Power Parity Argument
•Exchange rate movements will be matched by price movements.
• A theoretical exchange rate that allows you to buy the same amount of goods and services in
every country
•PPP does no necessary hold.

Slide #4:
The Investor Hedge Argument
•Exchange rate risk is irrelevant because investors can hedge exchange rate risk on their own.
•MNC shareholders can hedge against exchange rate fluctuations on their own.
•The investors may not have complete information on corporate exposure. They may not have
the capabilities to correctly insulate their individual exposure

Slide #5:
Currency Diversification Argument

• An MNC that is well diversified should not be affected by exchange rate movements because
of offsetting effects.
•This us a naive presumption.

Slide #6:
Stakeholder Diversification Argument
•Well diversified stakeholders will be somewhat insulated against losses experienced by an
MNC due to exchange rate risk.
•MNCs may be affected in the same way because of exchange rate risk.

Slide #7:
B. Types of Exposure

•Exchange rates cannot be forecasted with perfect

accuracy, but the firm can at least measure its exposure to exchange rate fluctuations.

•If the firm

is highly exposed to exchange rate fluctuations, it can consider techniques to reduce its
exposure.
Such techniques are identified in the following chapter. Before choosing among them, the firm
should first measure its degree of exposure.

Slide #8:
Exposure to exchange rate fluctuations comes in three forms:

• Transaction exposure
• Economic exposure
• Translation exposure