Page 174 - DMGT549_INTERNATIONAL_FINANCIAL_MANAGEMENT

Unit 10: Management of Operating/Economic Exposure

Solution: Notes
Currency Inflow Outflow Net Flow ER Exposure ($)
Canadian dollars 35,000,000 2,500,000 32,500,000 0.9 29,250,000
German Mark 5,500,000 1,600,000 3,900,000 0.62 2,418,000
French Franc 15,000,000 12,000,000 3,000,000 0.16 480,000
Swiss Franc 6,000,000 8,000,000 (2,000,000) 0.65 (1,300,000)
2. Jeanette Co. is a U.S.-based MNC that obtains 60 percent of its foreign supplies from
Malaysia. It also borrows Malaysia’s currency from banks and converts Malaysian dollars
to US dollars to support U.S. operations. It currently receives about 18 percent of its
revenue from customers. Its sales to Malaysia customers are denominated in M $. Discuss
how Jeanette Co. can reduce its economic exposure to exchange rate fluctuations.
Solution:

Malaysian dollar denominated operations of the US-based firm:
1. Purchase of 60% supplies in Malaysian Dollars
2. Borrowing in Malaysian Dollars-Usage after conversion to US$

3. Receipt of revenue to the tune of 18% in Malaysian Dollars
As we can see, the firm faces a large exposure to the Malaysian$/USD exchange rate
fluctuations.

Ways of managing Economic exposure due to above fluctuations:
Marketing Initiatives
1. Market Selection: The firm has 18 % customers in Malaysia. It should try and move
up the value chain and income group segments within the Malaysian consumer
market. This will make it less susceptible to exchange fluctuations.
2. Product Strategy: The firm should adopt strategies of product innovation and product
line expansion especially during times of home currency appreciation.
3. Pricing: In case of home currency appreciation, the firm should consider increase in
the foreign currency prices of its products, keeping the local competition constraint
in mind.
4. Promotional Strategy: In sync with the devaluation/appreciation the firm may
have to increase/decrease its promotional spend.
3. Claire Corp. is a U.S. based MNC that exports large supplies to Japan. The contract will
continue for several years and generate more than half of Claire’s total sales volume. The
Japan government pays Claire Corp in Japanese currency. About 20 percent of Claire’s
total running expenses are in Japanese currency; all other expenses are in U.S. dollars.
Explain the ways by which Claire Co. can reduce its transaction and economic exposure to
exchange rate fluctuations.

Solution:
Reducing Transaction Exposure
1. Claire Corp faces transaction exposure as it has contractual cash flows in Japanese
currency. If Japanese yen appreciates (depreciates) then receipts in dollar will be
higher (lower).

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