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Managing Economic Exposure and Translation Exposure: South-Western/Thomson Learning © 2006
Managing Economic Exposure and Translation Exposure: South-Western/Thomson Learning © 2006
Managing Economic Exposure and Translation Exposure: South-Western/Thomson Learning © 2006
Chapter
Chapter Objectives
12 - 2
Economic Exposure
Economic exposure refers to the impact
exchange rate fluctuations can have on a
firms future cash flows.
12 - 3
Economic Exposure
The economic impact of currency exchange
rates on us is complex because such
changes are often linked to variability in real
growth, inflation, interest rates,
governmental actions, and other factors.
These changes, if material, can cause us to
adjust our financing and operating
strategies.
PepsiCo
12 - 4
12 - 6
Managing
Madison Inc.s Economic Exposure
Madisons earnings before taxes is
inversely related to the Canadian dollars
strength, since the higher expenses more
than offset the higher revenue when the
Canadian dollar strengthens.
12 - 9
12 - 10
Sales in foreign
currency units
Reduce foreign
sales
Increase foreign
sales
Reliance on
foreign supplies
Increase foreign
supply orders
Reduce foreign
supply orders
Proportion of
foreign debt
Restructure debt
to increase debt
payments in
foreign currency
Restructure debt
to reduce debt
payments in
foreign currency
12 - 12
Translation Exposure
Translation exposure results when an
MNC translates each subsidiarys financial
data to its home currency for consolidated
financial reporting.
12 - 13
12 - 14
Limitations of
Hedging Translation Exposure
12 - 16