Page 163 - DMGT549_INTERNATIONAL_FINANCIAL_MANAGEMENT

International Financial Management Mahesh Kumar Sarva, Lovely Professional University

Notes Unit 10: Management of Operating/Economic Exposure

CONTENTS
Objectives
Introduction

10.1 Foreign Currency Hedging Strategies
10.1.1 Internal Hedging Strategies
10.1.2 External Hedging Strategies

10.2 Measuring Economic Exposure
10.2.1 Managing Economic Exposure
10.3 Corporate Philosophy for Exposure Management
10.4 Some Illustrations
10.5 Summary

10.6 Keywords
10.7 Review Questions
10.8 Further Readings

Objectives

After studying this unit, you will be able to:

Explain the foreign currency hedging strategies
Discuss the procedure for measuring economic exposure
Elaborate the corporate philosophy for exposure management
Discuss the illustrations for better understanding of economic exposure

Introduction

Economic exposure measures the impact of an actual conversion on the expected future cash
flows as a result of an unexpected change in exchange rates. An MNC may have established its
subsidiary in a country with price stability, favorable balance of payments, low rates of taxation
and readily available funds. However, if the economic situation of the country were to deteriorate,
these positive aspects may get reduced over time and the local currency will depreciate. The
subsidiary is likely to face immediate problems if it has to pay its imports in hard currencies and
in case it has borrowed from abroad. This will put the subsidiary at a competitive disadvantage.
For example, a British exporter who operates in the Indian market can increase his market share
merely by reducing the Indian prices of his products if the Indian rupee becomes strong against
the UK pound. Conversely, if the Indian rupee weakens against the British pound, the Indian
company which is a potential competitor to the British company can profit indirectly from
currency losses of the British company. Thus, even though the Indian company is not directly
exporting, yet competition in the business can be generated on account of the strength of the
currency of competitors.

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