Ch009 Management of Economic Exposure.docx

1、Ch009 Management of Economic ExposureEun & Resnick 4eCHAPTER 9 Management of Economic ExposureHow to Measure Economic ExposureInternational Finance in Practice: U.S. Firms Feel the Pain of Pesos PlungeOperating Exposure: DefinitionIllustration of Operating ExposureDeterminants of Operating ExposureM

2、anaging Operating ExposureSelecting Low-Cost Production SitesInternational Finance in Practice: The Strong Yen and Toyotas ChoiceFlexible Sourcing PolicyDiversification of the MarketR&D Efforts and Product DifferentiationFinancial HedgingInternational Finance in Practice: Porsche Powers Profit with

3、Currency PlaysCASE APPLICATION: Exchange Risk Management at MerckSummaryMINI CASE: Economic Exposure of Albion Computers PLCHow to Measure Economic Exposure1 Suppose the U.S. dollar substantially depreciates against the Japanese yen. The change in exchange ratea) Can have a significant economic cons

4、equences for U.S. firms. b) Can have a significant economic consequences for Japanese firms. c) Can have a significant economic consequences for both U.S. and Japanese firms. d) None of the aboveAnswer: c)2 Suppose the U.S. dollar substantially depreciates against the Japanese yen. The change in exc

5、hange ratea) Will tend to weaken the competitive position of import-competing U.S. car makers. b) Will tend to strengthen the competitive position of import-competing U.S. car makers. c) Will tend to strengthen the competitive position of Japanese car makers at the expense of U.S. makers. d) None of

6、 the aboveAnswer: b)3 When the Mexican peso collapsed in 1994, declining by 37 percent,a) U.S. firms that exported to Mexico and priced in peso were adversely affected. b) U.S. firms that exported to Mexico and priced in dollars were adversely affected. c) U.S. firms were unaffected by the peso coll

7、apse, since Mexico is such a small market.d) Both a) and b)Answer: d)Rationale: a) is obvious, the dollar value of revenue fell. Answer b) is less obvious, but those firms Mexican customers were less able to afford the imported goods.4 When exchange rates change,a) U.S. firms that sell only to domes

8、tic customers will be unaffected. b) U.S. firms that sell only to domestic customers can be affected if they compete against imports. c) U.S. firms that sell only to domestic customers will be affected, but only if they borrow in foreign currency to finance their domestic operations. d) Both a) and

9、b)Answer: b)5 When exchange rates change,a) This can alter the operating cash flow of a domestic firm.b) This can alter the competitive position of a domestic firm.c) This can alter the home currency values of a multinational firms assets and liabilities.d) All of the aboveAnswer: d)6 Two recent stu

10、dies have found a link between exchange rates and the stock prices of U.S. firms,a) This suggests that exchange rate changes can systematically affect the value of the firm by influencing its operating cash flows.b) This suggests that exchange rate changes can systematically affect the value of the

11、firm by influencing the domestic currency values of its assets and liabilities.c) a) and b)d) None of the above Answer: c)7 Economic exposure refers to(名词解释)a) the sensitivity of realized domestic currency values of the firms contractual cash flows denominated in foreign currencies to unexpected exc

12、hange rate changesb) the extent to which the value of the firm would be affected by unanticipated changes in exchange ratec) the potential that the firms consolidated financial statement can be affected by changes in exchange ratesd) ex post and ex ante currency exposuresAnswer: b) 8 It is conventio

13、nal to classify foreign currency exposures into the following types:a) economic exposure, transaction exposure, and translation exposureb) economic exposure, noneconomic exposure, and political exposurec) national exposure, international exposure, and trade exposured) conversion exposure, and exchan

14、ge exposureAnswer: a) 9 Exposure to currency risk can be measured by the sensitivities ofa) the future home currency values of the firms assets and liabilitiesb) the firms operating cash flows to random changes in exchange ratesc) a) and b)d) none of the aboveAnswer: c)10 Currency risk a) is the sam

15、e as currency exposureb) represents random changes in exchange ratesc) measure “what the firm has at risk”d) a) and b)Answer: b)11 Suppose a U.S.-based MNC maintains a vacation home for employees in the British countryside and the local price of this property is always moving together with the pound

16、 price of the U.S. dollar. As a result,a) Whenever the pound depreciates against the dollar, the local currency price of this property goes up by the same proportion.b) The firm is not exposed to currency risk even if the pound-dollar exchange rate fluctuates randomly.c) a) and b)d) none of the abov

17、eAnswer: c)12 The exposure coefficient in the regression is given by:a) b) c) a) and b)d) eAnswer: a)13 The exposure coefficient in the regression is:a) A measure of how a change in the exchange rate affects the dollar value of a firms assets.b) Has a value of zero if the value of the firms assets i

18、s perfectly correlated with changes in the exchange ratec) a) and b)d) none of the aboveAnswer: a)14 The link between the home currency value of a firms assets and liabilities and exchange rate fluctuations is:a) Asset exposureb) Operating exposurec) a) and b)d) none of the aboveAnswer: a)15 The lin

19、k between a firms future operating cash flows and exchange rate fluctuations is:a) Asset exposureb) Operating exposurec) a) and b)d) none of the aboveAnswer: b)Operating Exposure: Definition16 Operating exposure can be defined as:a) the future home currency values of the firms assets and liabilities

20、b) the extent to which the firms operating cash flows would be affected by random changes in exchange ratesc) the sensitivity of realized domestic currency values of the firms contractual cash flows denominated in foreign currencies to unexpected exchange rate changesd) the potential that the firms

21、consolidated financial statement can be affected by changes in exchange ratesAnswer: b) 17 The variability of the dollar value of an asset (invested overseas) depends on:a) the variability of the dollar value of the asset that is related to random changes in the exchange rateb) the dollar value vari

22、ability that is independent of exchange rate movementsc) a and bd) none of the aboveAnswer: c)18 Consider a U.S. MNC who owns a foreign asset. If the foreign currency value of the asset is inversely related to changes in the dollar-foreign currency exchange rate:a) the company has a built-in hedgeb)

23、 the dollar value variability that is independent of exchange rate movementsc) a and bd) none of the aboveAnswer: c)USE THE FOLLOWING INFORMATION TO ANSWER THE NEXT FOUR QUESTIONS A U.S. firm holds an asset in Great Britain and faces the following scenario:State 1State 2State 3Probability 25%50%25%S

24、pot rate $2.20/$2.00/$1.80/P*2,0002,5003,000P$4,400$5,000$5,400 where, P* = Pound sterling price of the asset held by the U.S. firmP = dollar price of the same asset19 The expected value of the investment in U.S. dollars is:a) $4,950b) $3,700c) $2,112.50d) none of the aboveAnswer: b)Rationale:E(P) =

25、 0.25 $4,400 + 0.50 $5,000 + 0.25 $5,400 = $4,95020 The variance of the exchange rate is:a) 0.00200b) 0.10c) 0.01d) none of the aboveAnswer: a)Rationale:E(S) = 0.25 $2.20 + 0.50 $2.00 + 0.25 $1.80 = $.55 + $1 + $.45 = $2.00VAR(S) = 0.25($2.20 $2.00)2 + 0.50($2.00 $2.00)2 + 0.25($1.80 $2.00)2 = 0.001

26、 + 0 + 0.001 = 0.002 21 The “exposure” (i.e. the regression coefficient beta) is:Hint: Calculate the expression a) 25,000b) 25,000c) 25d) none of the aboveAnswer: 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) = 27.5

27、0 + 0 22.50 = 50 b = 50/0.002 = 25,00022 Which of the following conclusions are correct?a) most of the volatility of the dollar value of the British asset can be removed by hedging exchange risk because b2Var(S) and Var(e) are 236,717 ($)2 and 493,751 ($)2 respectivelyb) most of the volatility of th

28、e dollar value of the British asset can not be removed by hedging exchange risk because b2Var(S) and Var(e) are 236,717 ($)2 and 493,751 ($)2 respectivelyc) most of the volatility of the dollar value of the British asset can NOT be removed by hedging exchange risk because b2Var(S) and Var(e) are 1,2

29、50,000 ($)2 and 1,122,500 ($)2 respectivelyd) most of the volatility of the dollar value of the British asset can be removed by hedging exchange risk because b2Var(S) and Var(e) are 1,250,000 ($)2 and 1,122,500 ($)2 respectivelyAnswer: c)Rationale:E(P) = 0.25 $4,400 + 0.50 $5,000 + 0.25 $5,400 = $4,

30、950Var(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 From the results to earlier questions we have the values:V(S) = 0.002 b = 25,000Therefore, using the Equation 9.2, we obtain V(P) = b2 Var(S) + Var(e) 127,500 = (25,000)2 0.002 + Va

31、r(e) Var(e) = 127,500 1,250,000 = 1,122,500 ($)2 The expression “b2 Var(S)” represents the volatility of the dollar value of the asset that is related to random changes in the exchange rate. The expression “Var(e)” is the volatility in the dollar value of the asset that is independent of exchange rate movements. Notice that theres a built in hedge in this example, when the exchange rate is down, the -denominated value of the asset is up and