Multinational Financial Management

Measuring and Managing Economic Exposure

Let's face it. If you've got 75% of your assets in the U.S. and 50% of your sales outside it, and the dollar's strong, you've got problems.

DONALD V. FITES

Executive Vice President

Caterpillar Inc.

LEARNING OBJECTIVES

• To define economic exposure and exchange risk and distinguish between the two
• To define operating exposure and distinguish between it and transaction exposure
• To identify the basic factors that determine the foreign exchange risk faced by a particular company or project
• To calculate economic exposure given a particular exchange rate change and specific cost and revenue scenarios
• To describe the marketing, production, and financial strategies that are appropriate for coping with the economic consequences of exchange rate changes
• To explain how companies can develop contingency plans to cope with exchange risk and the consequences of their ability to rapidly respond to currency changes
• To identify the role of the financial executive in facilitating the operation of an integrated exchange risk management program

Chapter 10 focused on the accounting effects of currency changes. As we saw in that chapter, the adoption of FASB 52 has helped to moderate the wild swings in the translated earnings of overseas subsidiaries. Nevertheless, the problem of coping with volatile currencies remains essentially unchanged. Fluctuations in exchange ...