Strategies for exposure

management

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 Exposure management strategies
must address TWO ques…..
1) What is our corporate attitude towards
risk?
2) How much cash are willing to spend to
protect against unrealised translation
loss?

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Strategy for managing exposure
• A company can take either an aggressive
or defensive approach.

• These losses don’t appear in the financial

statement but affect in the reduction of the
economic returns of the company

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 Strategies for exposure
management
Aggressive approach Defensive approach

• The aggressive exporter • The defensive firm would

would try to invoice the try to invoice the export
sale in what he expected sale in its home currency
to be a hard currency
(relative to his own
currency)

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Need for For-Ex Rate Projection
• 1.Hedging Decision:- A firm in the U.S
that plans to pay for Gems imported from
India in 90 Days. If the forecasted value of
the Indian rupee in 90 days is sufficiently
below the 90-day forward rate, the MNC
may not decide to hedge.

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2.Short Term Financing Decision:- when large
corporations borrow, they have access to several
different currencies .The currency they borrow will
ideally:-

1) a low interest rate.

2)weaken in value over the financing period.

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3.Short term investment decision:-
Corporations sometimes have an excess amount of
cash available for a short term

The ideal currency for deposit would:-

1)A high interest rate.
2) Strengthen in value over the investment period.

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4.Capital Budgeting Decision:- When an
MNC attempts to determine whether to
establish a subsidiary in a given country, a
capital budgeting analysis is conducted.
Forecasts of the future cash flow used within
the capital budgeting process will be
dependent on future currency values

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 5. Long term financing decision

• Corporations that issue bonds to secure

long term funds may consider
denominating the bonds in foreign
currencies