tailieunhanh - Ebook International financial management (10th edition): Part 2

(BQ) Part 2 book "International financial management" has contents: Measuring exposure to exchange rate fluctuations, managing transaction exposure, managing economic exposure and translation exposure, multinational capital budgeting, country risk analysis,.and other contents. | 10 Measuring Exposure to Exchange Rate Fluctuations CHAPTER OBJECTIVES The specific objectives of this chapter are to: ■ discuss the relevance of an MNC’s exposure to exchange rate risk, ■ explain how transaction exposure can be measured, ■ explain how economic exposure can be measured, and ■ explain how translation exposure can be measured. EXAMPLE Exchange rate risk can be broadly defined as the risk that a company’s performance will be affected by exchange rate movements. Since exchange rate movements can affect an multinational corporation’s (MNC’s) cash flow, they can affect an MNC’s performance and value. Exchange rate movements are volatile, and therefore can have a substantial impact on an MNC’s cash flows. MNCs closely monitor their operations to determine how they are exposed to various forms of exchange rate risk. Financial managers must understand how to measure the exposure of their MNCs to exchange rate fluctuations so that they can determine whether and how to protect their operations from that exposure. In this way, they can reduce the sensitivity of their MNC’s values to exchange rate movements. RELEVANCE OF EXCHANGE RATE RISK Exchange rates are very volatile. Consequently, the dollar value of an MNC’s future payables or receivables position in a foreign currency can change substantially in response to exchange rate movements. The following example illustrates how the value of a firm’s transactions can change over time in response to exchange rate movements. Consider a . firm whose business is to import products and sell them in the United States. It pays 1 million euros at the beginning of each quarter. If it does not hedge, the dollar value of its payables changes in line with the value of the euro, as shown in Exhibit . When the euro was weak (such as in 2006), the firm’s expenses were low. However, when the euro was strong (such as in 2008), its expenses were high. From the first quarter of 2006 to the second quarter of 2008,