Pattern Occurrency Movements

I. INTRODUCTION:

• …In order to take advantage of currency movements, it would be a good idea to put our factories on board a super tanker, which could put down anchor wherever exchange rates enable the company to function most efficiently. … In the present current markets…would certainly not be a suitable means of transport for taking advantage of exchange rate movement. An aeroplane would be more in line with the requirements of the present era. (Snijders, 1998, p. 71)

• The first is that exchange rate uncertainty is not only a source of concern to the firm. It also creates the potential for supernormal gains. In the ideal situation, production takes place wherever (the firm can "function most efficiently" or "take advantage of exchange

• It pertains to firm's market value, whereas accounting exposure concerns book values. In judging the firm's longer-term chance of survival, economic exposure is more important exposure concept. Real, rather than nominal exchange rate movements, have an impact on the competitive position of a company, affecting cash flows and market valuation of the firm.

• It can be separated into two parts: transaction exposure and real operating exposure. A firm has transaction exposure if it has contractual payables or receivables in Foreign Country. Real operating exposure refers to the non-contractual future cash flows of the firm.

• Corporate cash flows can be affected by the movements of exchange rate in ways indirectly associated with foreign transactions. Thus, firms cannot just focus on hedging the foreign currency payables or receivables; but must also attempt to determine how all their cash flows will be affected by the possible movements of exchange rate.

B. Effects:

• The effect of exchange rates on a firm's actual performance is dependent on the following:

(1) the variability of the exchange rates that are relevant to the firm

Managing Economic Exposure A. Effects

• Increases cash inflows or reduces cash outflows

• Decreases/ reduces financing cost, which lowers cost of capital

• Stabilizes earnings, which decreases the risk and also cost of capital

B. Assessment of Economic Exposure

• Determine how sensitive a MNC to economic exposure by measuring the exposure of its each currency in terms of cash inflows and outflows

C. Restructure Economic Exposure

• The way a MNC restructures its operations in reducing economic exposure to exchange rate risk is dependent on its form of exposure.

• Involves shifting or diverting the sources of costs/expenses or revenue/income to other locations to match cash inflows and cash outflows in foreign currencies

• Thus, by increasing the sensitivity of revenue and reducing the sensitivity of expenses to exchange rate movements, it can reduce its economic exposure

D. Issues Involved in the Restructuring Decisions

• Restructuring operations which reduces economic exposure is more difficult task than hedging any foreign currency transaction, making management of economic exposure more complex than the management of transaction