PowerPoint Presentation by 5Y5U7F0


									              Economic Exposure

The extent to which the value of the firm will change on
   account of a change in exchange rates. Such
   exposure may arise from two sources
   Transaction Exposure
   due to gains or losses on foreign currency
   denominated contracts.
   Operating Exposure
   due to changes in future revenues and/or costs.
Can a US company that solely uses US production and
   US raw materials and sells only to US consumers be
   exposed to foreign exchange operating exposure?
Real Exchange Rate change vs
Nominal Exchange Rate change

If PPP holds true, the nominal rate changes with inflation
    but real exchange does not.
Assuming that all costs and revenues of the
   multinational company rise equally at the rate of
   inflation, then a change in the nominal without a
   change in the real does not alter the competitive
   position of domestic or foreign firm.
Example: Apex Spain sells medical imaging devices in
   Spain and headquarters in US.
Current Exchange Rate = $0.01 / Peseta
Cost of producing one unit = 40,000 Pta = $400
Sales price = 100,000 Pta = $1000
Profit Margin = 60,000 Pta = $600
Say inflation in Spain = 20% in next year and 0% in US.
If PPP holds, what will be new exchange rate in terms of
New Sales price = 1.20 * 100,000 = 120,000
New Cost = 1.2 * 40,000 = 48,000
New Profit Margin = 72,000 Pta = ? $
Since PPP does not hold in the short run, an appreciation
   of the real value of a currency does hurt the exporters
   as well as industries competing with imports

Eg. Swiss watch makers could not raise price in US but
    dollar cost of Swiss watch manufacture was rising.

Yen went from 240Yen/$ to 90Yen/$ from 1985 – 1995.
   This appreciation was much more than what was
   warranted by the difference in inflation rates.
Industrias Penoles, a Mexican firm that refines silver,
   increased profits by more than 200% when Mexican
   peso devauled in 1982 and also in 1995 when there
   was a devaluation.

Costs denominated in pesos were constant.
Revenues determined by intl price silver, not affected by
   value of peso.
Devaluation of Thai Baht in 1997
Delta Electronics: Share price increased dramatically
   after devaluation (increase both in $ terms and Baht

Thai Petrochemical Industries – share price dropped by
   50% after devaluation?

Aspen skiing company – operates ski resorts in Colarado
   Rockies, buys supplies in $, uses American labor ..,
   guests pay in $.

How would it be affected by value of $?
Petroleos Mexicanos (Pemex): Largest company in
    Mexico – oil company in exploration, drilling and

Costs – are they domestic or international?
If all the oil is sold abroad, is there significant exchange
     rate risk?

If all oil is sold in Mexico, is there significant exchange
     rate risk?

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