Page 176 - DMGT549_INTERNATIONAL_FINANCIAL_MANAGEMENT

Unit 10: Management of Operating/Economic Exposure

Solution: Notes
The firm could borrow the amount of Australian dollars so that the 450,000 Australian
dollars to be received could be used to pay off the loan. This amounts to (450,000/1.025) =
about AU $439, 024, which could be converted to about $421, 902 and invested. The
borrowing of Australian dollars has offset the transaction exposure due to the future
receivables in Australian dollars.
6. A MNC has net payables of 450,000 Mexican pesos in 180 days. The Mexican interest rate is
7.5 percent over 180 days, and the spot rate of the peso is $.096. Suggest how the U.S. firm
could implement a money market hedge.
Solution:

The firm could borrow the amount of Mexican pesos so that the 450,000 Mexican pesos to
be received could be used to pay off the loan. This amounts to (450,000/1.075) = about $418,
604, which could be converted to about $40, 186 and invested. The borrowing of Mexican
pesos has offset the transaction exposure due to the future receivables in Mexican pesos.

Task Review a few annual reports of MNCs. Do you think that some industries are
more exposed to economic exposure than others? Based on the economic exposure of the
MNC, comment on the methods it uses to hedge its exposure.

Case Study Economic Exposure: PC Pacific India Ltd.

Introduction
PC Pacific, India’s largest listed IT services company, has a strong presence across emerging
technologies. Services provided to infrastructure companies in the communications space
account for one–third of the global IT services revenue. It is one of the few select companies
in India that will follow the wireless and broadband evaluation ground up to the enterprise
stage. Unlike other Indian companies, PC Pacific’s margins hold considerable uptide in
the medium term, given its low billing rates and off-shore component.
PC Pacific has a business model of a balanced business mix of technology and applications
and client mix of technology, vendors and enterprises. Its ability to provide system design
services to communication equipment manufacturers puts it at the forefront of emerging
wireless and broadband revolution.

PC Pacific is operationally based at the Cyber Valley in the USA. It does all its billings in
US dollars, as almost all of its major clients are based in the USA or Canada. However, it
has a substantial chunk of its sales in Europe and South East Asia as well. Since its
headquarters are based in India, it is quite susceptible to exchange rate risk. This case
study is intended to illustrate the economic risk that the company faces.
The following is the sales, costs after-tax income and cash for the previous year, for 2001.
It is based on the 1st April 2001 exchange rate of $1= ` 45.85. The exchange rate expected for
the year ended, 31st March 2002 was $1=` 47.10.

Contd...

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