Economic exposure - SUMMARY OF COURSE MATERIAL FOR WEEKS 12-13 PDF

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Summary

SUMMARY OF COURSE MATERIAL FOR WEEKS 12-13...

Description

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Assessing economic exposure o

Determine how cash flows may be affected by exchange rate scenarios in the future.

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Evaluate business operations to assess “whether and how” to make changes so that cash flows are less sensitive exchange rates in the future.  This presupposes that fundamental research has been conducted to determine the future trends in currency exchange rates.  It also presumes that the likely direction and the range of exchange rate fluctuations are adverse

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Restructuring to reduce economic exposure o

If management believes that cash flows will be adversely effected by a exchange rate, they can attempt to restructure the MNC’s operations and supply chain (example, shifting the sources of revenues or expenses to reduce the exchange rate exposure to cash flows

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Restructuring the operations is not a short-term exercise.

Restructuring to reduce economic exposure-continued o

The method of restructure depends upon the areas in which exchange rate exposure plays a key role (as examples, the percentage of foreign sales in Europe vs domestic sales OR outsourcing to Mexico vs outsourcing to Canada vs manufacturing in the US)

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Limitations of restructuring

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“Some forms of restructuring that are intended to reduce economic exposure can have an adverse effect on an MNC” (Madura)

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According to Madura, many growing MNCs have increased both firm value and economic exposure. For example, they could reduce economic exposure by reducing foreign sales but that would also reduce cash flow.

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Madura believes that an “ideal solution” would be a form of restructuring where the MNC maintains existing business but maintains a balance of foreign inflows and outflows of cash...