International-FinancialManagement-6国际财务管理课件

Chapter6ManagingEconomicExposureAndTranslationExposureObjectives•ThischaptershowshowanMNCcanrestructureitsoperationstoreduceeconomicexposure.Suchastrategyisrelatedtothefirm’slong-runoperations.•ItalsobrieflydescribeshowanMNC’stranslationexposurecanbereduced.Yet,Itisadvisedthatthelimitationsofhedgingtranslationexposurereceivesasmuchattentionasthehedgingstrategyitself.EconomicExposure•Economicexposurereferstotheimpactexchangeratefluctuationscanhaveonafirm’sfuturecashflows.•Recallthatcorporatecashflowscanbeaffectedbyexchangeratemovementsinwaysnotdirectlyassociatedwithforeigntransactions.EconomicExposure•Exchangeratechangesareoftenlinkedtovariabilityinrealgrowth,inflation,interestrates,governmentalactions,…thechangesmaycausefirmstoadjusttheirfinancingandoperatingstrategies.•TheimportanceofmanagingeconomicexposurecanbeseenfromthecaseofthebankruptcyofLakerAirways,andfromthethe1997-98Asiancrisis.HowFinancialMarketsAffectedLakerAirlinesLakerAirwaysisaBritishairlinethatgeneratedmuchofitsrevenueinBritishpounds,alargeproportionofitsexpenses(suchasfuel,oil,anddebtpayments),however,weredenominatedindollars.Asthedollarstrengthenedintheforeignexchangemarketin1981,Lakerneededlargeramountsinpoundstocoveritsdollar-denominatedexpenses.InJanuary1981,Lakerborrowed$131millionsinthefinancialmarketsfromagroupofU.S.andEuropeanbanks.ThedebtwasdenominatedinU.SdollarsandthereforehadtoberepaidinU.S.dollars.Laker’sdecisionHowFinancialMarketsAffectedLakerAirlinestoobtaindollar-denominateddebtinthefinancialmarketsfurtherincreaseditseconomicexposure.Asthedollarcontinuedtostrengthen,thefirm’srevenuescouldnotadequatelycoveritsdollar-denominatedexpenses.Consequently,LakerAirwayswentbankrupt.Itmighthaveavoidedbankruptcyifithadreduceditseconomicexposure,eitherbyreducingitsdollar-denominatedexpensesorbyincreasingitsdollar-denominatedrevenue.Overall,Laker’sperformancewasaffectedbyconditionsintheforeignexchangemarketalongwithitsdecisiontoborrowdollarsinthedebtmarket.EconomicExposure•Afirmcanassessitseconomicexposurebydeterminingthesensitivityofitsexpensesandrevenuestovariouspossibleexchangeratescenarios.•Thefirmcanthenreduceitsexposurebyrestructuringitsoperationstobalanceitsexchange-rate-sensitivecashflows.•Notethatcomputerspreadsheetsareoftenusedtoexpeditetheanalysis.EconomicExposure•Restructuringmayinvolve:increasing/reducingsalesinneworexistingforeignmarkets,increasing/reducingdependencyonforeignsuppliers,establishingoreliminatingproductionfacilitiesinforeignmarkets,and/orincreasingorreducingthelevelofdebtdenominatedinforeigncurrencies.EconomicExposure•MNCsmustbeveryconfidentaboutthelong-termpotentialbenefitsbeforetheyproceedtorestructuretheiroperations,becauseofthehighcostsofreversal.ManagingMadisonInc.’sEconomicExposure(example)•TheamountofMadison’searningsbeforetaxesisinverselyrelatedtothestrengthoftheCanadiandollar,sincethehigherexpensesmorethanoffsetthehigherrevenue.(Exhibit6.1)•MadisonmayreduceitsexposurebyincreasingCanadiansales,reducingordersofCanadianmaterials,and/orborrowinglessfromCanadianbanks.(Exhibit6.2)ManagingMadisonInc.’sEconomicExposure(example)Exhibit6.1OriginalImpactofPossibleExchangeRateMovementsonEarningsofMadison,Inc.(inMillions)ExchangeRateScenarioC$=$.75C$=$.80C$=$.85Sales:(1)U.S.$300.00$304.00$307.00(2)CanadianC$4=3.00C$4=3.20C$4=3.40(3)Total$303.00$307.20$310.40Costofgoodssold:(4)U.S.$50.00$50.00$50.00(5)CanadianC$200=150.00C$200=160.00C$200=170.00(6)Total$200.00$210.00$220.00(7)GrossProfit$103.00$97.20$90.40Operatingexpenses:(8)U.S.:Fixed$30.00$30.00$30.00(9)U.S.Variable(10%oftotalsales)30.3030.7231.04(10)Total60.3060.7261.04(11)EBIT$42.70$36.48$29.36Interestexpense:(12)U.S.$3.00$3.00$3.00(13)CanadianC$10=7.50C$10=8.00C$10=8.50(14)Total$10.50$11.00$11.50(15)EBT$32.20$25.48$17.86ManagingMadisonInc.’sEconomicExposure(example)Exhibit6.2ManagingMadisonInc.’sEconomicExposure(inMillions)(ProposedStructure)C$=$.75C$=$.80C$=$.85Sales:(1)U.S.$300.00$304.00$307.00(2)CanadianC$20=15.00C$20=16.00C$20=17.00(3)Total$315.00$320.00$324.00Costofgodssold:(4)U.S.$140.00$140.00$140.00(5)CanadianC$100=75.00C$100=80.00C$100=85.00(6)Total$215.00$220.00$225.00(7)Grossprofit$100.00$100.00$99.00Operatingexpenses:(8)U.S.-Fixed$32.00$32.00$32.00(9)U.S.–Variable31.5032.0032.40(10)Total$63.50$64.00$64.40(11)EBIT$36.50$36.00$34.60Interestexpense:(12)U.S.$7.00$7.00$7.00(13)CanadianC$5=3.75C$5=4.00C$5=4.25(14)Total$10.75$11.00$11.25(15)EBT$25.75$25.00$23.35ACaseStudyinHedgingEconomicExposure*CheckthecaseofSavorCo.inyourbook.(P302-307)*Findmorecasesbyyourself.TranslationExposure•TranslationexposureresultswhenanMNCtranslateseachsubsidiary’sfinancialdatatoitshomecurrencyforconsolidatedfinancialreporting.•Translationexposuredoesnotdirectlyaffectcashflows,butsomefirmsareconcernedaboutitbecauseofitspotentialimpactonreportedconsolidatedearnings.TranslationExposure•AnMNCmayattempttoavoidtranslationexposurebymatchingitsforeignliabilitieswithitsforeignassets.•Tohedgetranslationexposure,forwardorfuturescontractscanbeused.Specifically,anMNCmaysellthecurrenc