Ch009 Management of Economic Exposure.docx

Ch009 Management of Economic Exposure.docx

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Ch009ManagementofEconomicExposure

Eun&Resnick4e

CHAPTER9ManagementofEconomicExposure

HowtoMeasureEconomicExposure

InternationalFinanceinPractice:

U.S.FirmsFeelthePainofPeso’sPlunge

OperatingExposure:

Definition

IllustrationofOperatingExposure

DeterminantsofOperatingExposure

ManagingOperatingExposure

SelectingLow-CostProductionSites

InternationalFinanceinPractice:

TheStrongYenandToyota’sChoice

FlexibleSourcingPolicy

DiversificationoftheMarket

R&DEffortsandProductDifferentiation

FinancialHedging

InternationalFinanceinPractice:

PorschePowersProfitwithCurrencyPlays

CASEAPPLICATION:

ExchangeRiskManagementatMerck

Summary

MINICASE:

EconomicExposureofAlbionComputersPLC

HowtoMeasureEconomicExposure

1SupposetheU.S.dollarsubstantiallydepreciatesagainsttheJapaneseyen.Thechangeinexchangerate

a）CanhaveasignificanteconomicconsequencesforU.S.firms.

b）CanhaveasignificanteconomicconsequencesforJapanesefirms.

c）CanhaveasignificanteconomicconsequencesforbothU.S.andJapanesefirms.

d）Noneoftheabove

Answer:

c）

2SupposetheU.S.dollarsubstantiallydepreciatesagainsttheJapaneseyen.Thechangeinexchangerate

a）Willtendtoweakenthecompetitivepositionofimport-competingU.S.carmakers.

b）Willtendtostrengthenthecompetitivepositionofimport-competingU.S.carmakers.

c）WilltendtostrengthenthecompetitivepositionofJapanesecarmakersattheexpenseofU.S.makers.

d）Noneoftheabove

Answer:

b）

3WhentheMexicanpesocollapsedin1994,decliningby37percent,

a）U.S.firmsthatexportedtoMexicoandpricedinpesowereadverselyaffected.

b）U.S.firmsthatexportedtoMexicoandpricedindollarswereadverselyaffected.

c）U.S.firmswereunaffectedbythepesocollapse,sinceMexicoissuchasmallmarket.

d）Botha）andb）

Answer:

d）

Rationale:

a）isobvious,thedollarvalueofrevenuefell.Answerb）islessobvious,butthosefirm’sMexicancustomerswerelessabletoaffordtheimportedgoods.

4Whenexchangerateschange,

a）U.S.firmsthatsellonlytodomesticcustomerswillbeunaffected.

b）U.S.firmsthatsellonlytodomesticcustomerscanbeaffectediftheycompeteagainstimports.

c）U.S.firmsthatsellonlytodomesticcustomerswillbeaffected,butonlyiftheyborrowinforeigncurrencytofinancetheirdomesticoperations.

d）Botha）andb）

Answer:

b）

5Whenexchangerateschange,

a）Thiscanaltertheoperatingcashflowofadomesticfirm.

b）Thiscanalterthecompetitivepositionofadomesticfirm.

c）Thiscanalterthehomecurrencyvaluesofamultinationalfirm’sassetsandliabilities.

d）Alloftheabove

Answer:

d）

6TworecentstudieshavefoundalinkbetweenexchangeratesandthestockpricesofU.S.firms,

a）Thissuggeststhatexchangeratechangescansystematicallyaffectthevalueofthefirmbyinfluencingitsoperatingcashflows.

b）Thissuggeststhatexchangeratechangescansystematicallyaffectthevalueofthefirmbyinfluencingthedomesticcurrencyvaluesofitsassetsandliabilities.

c）a）andb）

d）Noneoftheabove

Answer:

c）

7Economicexposurerefersto（名词解释）

a）thesensitivityofrealizeddomesticcurrencyvaluesofthefirm’scontractualcashflowsdenominatedinforeigncurrenciestounexpectedexchangeratechanges

b）theextenttowhichthevalueofthefirmwouldbeaffectedbyunanticipatedchangesinexchangerate

c）thepotentialthatthefirm’sconsolidatedfinancialstatementcanbeaffectedbychangesinexchangerates

d）expostandexantecurrencyexposures

Answer:

b）

8Itisconventionaltoclassifyforeigncurrencyexposuresintothefollowingtypes:

a）economicexposure,transactionexposure,andtranslationexposure

b）economicexposure,noneconomicexposure,andpoliticalexposure

c）nationalexposure,internationalexposure,andtradeexposure

d）conversionexposure,andexchangeexposure

Answer:

a）

9Exposuretocurrencyriskcanbemeasuredbythesensitivitiesof

a）thefuturehomecurrencyvaluesofthefirm’sassetsandliabilities

b）thefirm’soperatingcashflowstorandomchangesinexchangerates

c）a）andb）

d）noneoftheabove

Answer:

c）

10

Currencyrisk

a）isthesameascurrencyexposure

b）representsrandomchangesinexchangerates

c）measure“whatthefirmhasatrisk”

d）a）andb）

Answer:

b）

11SupposeaU.S.-basedMNCmaintainsavacationhomeforemployeesintheBritishcountrysideandthelocalpriceofthispropertyisalwaysmovingtogetherwiththepoundpriceoftheU.S.dollar.Asaresult,

a）Wheneverthepounddepreciatesagainstthedollar,thelocalcurrencypriceofthispropertygoesupbythesameproportion.

b）Thefirmisnotexposedtocurrencyriskevenifthepound-dollarexchangeratefluctuatesrandomly.

c）a）andb）

d）noneoftheabove

Answer:

c）

12Theexposurecoefficientintheregression

isgivenby:

a）

b）

c）a）andb）

d）e

Answer:

a）

13Theexposurecoefficient

intheregression

is:

a）Ameasureofhowachangeintheexchangerateaffectsthedollarvalueofafirm’sassets.

b）Hasavalueofzeroifthevalueofthefirm’sassetsisperfectlycorrelatedwithchangesintheexchangerate

c）a）andb）

d）noneoftheabove

Answer:

a）

14Thelinkbetweenthehomecurrencyvalueofafirm’sassetsandliabilitiesandexchangeratefluctuationsis:

a）Assetexposure

b）Operatingexposure

c）a）andb）

d）noneoftheabove

Answer:

a）

15Thelinkbetweenafirm’sfutureoperatingcashflowsandexchangeratefluctuationsis:

a）Assetexposure

b）Operatingexposure

c）a）andb）

d）noneoftheabove

Answer:

b）

OperatingExposure:

Definition

16Operatingexposurecanbedefinedas:

a）thefuturehomecurrencyvaluesofthefirm’sassetsandliabilities

b）theextenttowhichthefirm’soperatingcashflowswouldbeaffectedbyrandomchangesinexchangerates

c）thesensitivityofrealizeddomesticcurrencyvaluesofthefirm’scontractualcashflowsdenominatedinforeigncurrenciestounexpectedexchangeratechanges

d）thepotentialthatthefirm’sconsolidatedfinancialstatementcanbeaffectedbychangesinexchangerates

Answer:

b）

17Thevariabilityofthedollarvalueofanasset（investedoverseas）dependson:

a）thevariabilityofthedollarvalueoftheassetthatisrelatedtorandomchangesintheexchangerate

b）thedollarvaluevariabilitythatisindependentofexchangeratemovements

c）aandb

d）noneoftheabove

Answer:

c）

18ConsideraU.S.MNCwhoownsaforeignasset.Iftheforeigncurrencyvalueoftheassetisinverselyrelatedtochangesinthedollar-foreigncurrencyexchangerate:

a）thecompanyhasabuilt-inhedge

b）thedollarvaluevariabilitythatisindependentofexchangeratemovements

c）aandb

d）noneoftheabove

Answer:

c）

USETHEFOLLOWINGINFORMATIONTOANSWERTHENEXTFOURQUESTIONS

AU.S.firmholdsanassetinGreatBritainandfacesthefollowingscenario:

State1

State2

State3

Probability

25%

50%

25%

Spotrate

$2.20/£

$2.00/£

$1.80/£

P*

£2,000

£2,500

£3,000

P

$4,400

$5,000

$5,400

where,

P*=PoundsterlingpriceoftheassetheldbytheU.S.firm

P=dollarpriceofthesameasset

19TheexpectedvalueoftheinvestmentinU.S.dollarsis:

a）$4,950

b）$3,700

c）$2,112.50

d）noneoftheabove

Answer:

b）

Rationale:

E（P）=0.25×$4,400+0.50×$5,000+0.25×$5,400=$4,950

20Thevarianceoftheexchangerateis:

a）0.00200

b）0.10

c）0.01

d）noneoftheabove

Answer:

a）

Rationale:

E（S）=0.25×$2.20+0.50×$2.00+0.25×$1.80=$.55+$1+$.45=$2.00

VAR（S）=0.25（$2.20–$2.00）2+0.50（$2.00–$2.00）2+0.25（$1.80–$2.00）2=0.001+0+0.001

=0.002

21The“exposure”（i.e.theregressioncoefficientbeta）is:

Hint:

Calculatetheexpression

a）–25,000

b）25,000

c）–25

d）noneoftheabove

Answer:

a）

Rationale:

Cov（P,S）

=0.25×（$4,400–$4,950）×（$2.20–$2.00）

+0.50×（$5,000–$4,950）×（$2.00–$2.00）+0.25（$5,400–$4,950）（$1.80–$2.00）

=–27.50+0–22.50

=–50

b=–50/0.002

=–25,000

22Whichofthefollowingconclusionsarecorrect?

a）mostofthevolatilityofthedollarvalueoftheBritishassetcanberemovedbyhedgingexchangeriskbecauseb2[Var（S）]andVar（e）are236,717（$）2and493,751（$）2respectively

b）mostofthevolatilityofthedollarvalueoftheBritishassetcannotberemovedbyhedgingexchangeriskbecauseb2[Var（S）]andVar（e）are236,717（$）2and493,751（$）2respectively

c）mostofthevolatilityofthedollarvalueoftheBritishassetcanNOTberemovedbyhedgingexchangeriskbecauseb2[Var（S）]andVar（e）are1,250,000（$）2and–1,122,500（$）2respectively

d）mostofthevolatilityofthedollarvalueoftheBritishassetcanberemovedbyhedgingexchangeriskbecauseb2[Var（S）]andVar（e）are1,250,000（$）2and–1,122,500（$）2respectively

Answer:

c）

Rationale:

E（P）=0.25×$4,400+0.50×$5,000+0.25×$5,400

=$4,950

Var（P）=0.25（$4,400–$4,950）2+0.50（$5000–$4,950）2+0.25（$5,400–$4,950）2

=75,625+1,250+50,625

=127,500（$）2

Fromtheresultstoearlierquestionswehavethevalues:

V（S）=0.002

b=–25,000

Therefore,usingtheEquation9.2,weobtain

V（P）=b2Var（S）+Var（e）

127,500=（–25,000）2×0.002+Var（e）

Var（e）=127,500–1,250,000

=–1,122,500（$）2

Theexpression“b2Var（S）”representsthevolatilityofthedollarvalueoftheassetthatisrelatedtorandomchangesintheexchangerate.Theexpression“Var（e）”isthevolatilityinthedollarvalueoftheassetthatisindependentofexchangeratemovements.Noticethatthere’sabuiltinhedgeinthisexample,whentheexchangerateisdown,the£-denominatedvalueoftheassetisupand