firms ability to

adjust its
i. markets
ii. product mix,
iii. and sourcing
in response to
exchange rate
changes.

DETERMINAN
TS OF
OPERATING
EXPOSURE

The market
structure of
inputs and
products

OPERATING EXPOSURE
EFFECT
Variables

Benchmark case

Case 1

Case 2

Case 3

Exchange rate (RM/S$)

1.60

1.40

1.40

1.40

Unit variable cost (S$)

650

696

696

722

Unit sales price (S$)

1, 000

1, 000

1, 143

1, 080

Sales volume (units)

50, 000

50, 000

50, 000

40, 000

Annual cash flow (S$)

7, 250, 000

6, 100, 000

9, 675, 000

5, 660, 000

Annual cash flow (RM)

11, 600, 000

8, 540, 000

13, 545, 000

7, 924, 000

Four-year present value 33, 118, 000

(RM)

24, 382, 000

38, 671, 000

22, 623, 000

Operating
gains/losses(RM)

-8, 736, 000

5, 553, 000

-10, 495, 000

EXAMPLE
Chrysler Thailand- subsidiary of Chrysler
Situation: RM appreciates against Thai baht
Consequences:

If Chrysler
Thailand face
competition from
Thailand car
makers, what
happen?

If Chrysler
Thailand face
competition from
other Malaysia
car makers, what
happen?

HIGH DEGREE OF OPERATING EXPOSURE: EITHER cost OR its

price is
sensitive to exchange
rate changes

NO MAJOR OPERATING EXPOSURE: BOTH cost AND price are

sensitive/
insensitive to exchange rate changes

FIRMS ABILITY TO
STABILIZE CASH FLOWS
Ways to reduce exposure
1. source Thailand parts and materials
2. Produce cars in Thailand and hire local
workers
The most important key **
Firms flexibility regarding PRODUCTION
LOCATIONS, SOURCING, FINANCIAL HEDGING
STRATEGY

INFLATION DIFFERENTIAL
Annual inflation rate: Malaysia ( 4%)
Thailand (15%)
MYR vs Baht : Ringgit appreciates about 11%
SO, do Chrysler have operating exposure?
What if MYR appreciates > 11% against baht?

PRICING STRATEGIES
1. Pass the cost shock fully to its selling
price (complete pass-through)
2. Fully absorb the shock to keep its
selling prices unaltered (No- through)
3. Do some combination of two strategies
mentioned (Partial pass-through)