CHAPTER 12: OPERATING EXPOSURE
1. A multinational’s operating exposure
- Operating exposure = strategic exposure = economic exposure = competitive exposure.
- Operating exposure measures changes in present value of a firm resulting from changes in future
operating cash flows caused by unexpected changes in exchange rates.
Static vs Dynamic exposure
- Transaction exposure: Static exposure -> In short term period, ST Cash flow is fixed
- Operating exposure: Dynamic exposure -> In medium/ LT, Cash flow is flexible.
Operating & Financing Cash Flows
- Operating cash flows for Aidan arise from intercompany (between unrelated com- panies) and
intracompany (between units of the same company) receivables and payables, such as rent and
lease payments for the use of facilities and equipment, royalty and license fees for the use of
technology and intellectual property, and assorted management fees for services provided.
- Financing cash flows are payments for the use of intercompany and intracompany loans
(principal and interest) and stockholder equity (new equity investments and dividends).
Expected vs unexpected changes in cash flow.
An “expected change” arises from different perspective of:
- Management
- A debt service: Fisher effect - su khac biet trong ty gia co the den tu su khac biet trong lai suat
- Investor
- Broader macroeconomic
Measuring operating exposure
A purely domestic company can face operating exposure. Because in medium & long term run, new
international enter the domestic market.
2. Measuring operating exposure
The change in exchange rate affects the operating cash flow, in terms of: prices, costs, sales volume.
There are 4 cases happening:
- Depreciation but all variables remain constant. => Firm’s present value decreases
- Increase in sales volume (other variables remain constant). => Firm’s present value increases
- Increase in sales price (other variables remain constant). ). => Firm’s present value increases
- Sales price, cost & volume increase). => Firm’s present value increases
OCF = NET INCOME + NON-CASH EXPENSE (ex: Depreciation) – CHANGES IN NWC
CHANGES IN NWC = NWC current year - NWC last year
NWC = Current Asset – Current Liabilities
= Account Receivable + Inventory + Marketable investments – Account payble
Changes in NWC > 0 when NWC current year > NWC last year => Decrease in OCF vi Inventory may
increase and decrease in A/P will lead a decrease in OCF.
Account Receivable = (Sales x A/R days)/ 365 = 9,924,658
Inventory = (COGS x Inventory days) / 365 = 1,657,534
A/P = (Sales x A/P days) / 365 = 8,380,821
NWC = A/R + Inventory – A/P = 3,201,371
3. Strategic management of Operating exposure
Diversifying operation: diversifying sales, location of production facilities, and buy raw material
sources more than 1 country
+ A structural strategy to pre-positioning the firm for managing operating exposure – MAIN
STRATEGY
+ Management can often recognize symptoms as soon as Purchasing Parity Power in disequilibrium.
Diversifying financing: raising funds in more than one capital market and in more than one currency.
+ Take advantage of temporary deviations from the International Fisher Effect
rf = (1 + if) x (1 + ef) - 1
Ef <0 -> rf giam
4. Proactive management of operating exposure: Main ones are 4 cai dau
4.1/ Matching currency cash flows
- MNE creates foreign currency outflow to match currency inflow
- MNE (USD) acquires debt denominated in that currency (USD)
- There are 3 alternatives:
+ U.S firm seeks out potential suppliers of materials or components in Canada
4.2/ Risk-sharing agreements
Risk sharing is a contractual arrangement in which the buyer and seller agree to “share” or split
currency movement impacts on payments between them. The ultimate goal: is to alleviate currency
pressures on the continuing business relationship.
4.3/ Back-to-back. Or Parallel Loans (Credit swap)
Back-to-back loan occurs when two business firms in separate countries arrange to borrow each
other’s currency for a specific period of time.
Ng cho vay: receive collateral in other currency
Cons: hard to find a partner, risks incur
Back-to-back loan doesn’t appear on the balance sheet
4.4/ Cross-currency swap
A cross-currency swap resembles a back-to-back loan except that it does not appear on a firm’s
balance sheet.
2 firms borrow funds in markets and currencies where they are well known.
4.5/ Contractual approaches – occasionally use vi costly
MNE hedge operating exposure with contractual strategies
- MNE usually can’t use Forward contract to hedge operating exposure. (because it’s long-term
cash flow). - Contractual approaches (i.e., options and forwards) have occasionally been used to
hedge operating expo- sure but are costly and possibly ineffectual.
