Professional Documents
Culture Documents
0.80
0.60
0.40 $/Singapore$ $/5 Swedish krona
0.20 $/Chinese yuan
0.00
1981 1986 1991 1996 2001
Transaction Exposure
PCFt = a0 + a1et + 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
t = random error term
a0 = intercept
a1 = slope coefficient
Economic 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
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
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
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