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1、1Chapter6ManagingEconomicExposureAndTranslationExposure2ObjectivesThischaptershowshowanMNCcanrestructureitsoperationstoreduceeconomicexposure.Suchastrategyisrelatedtothefirm’slong-runoperations.ItalsobrieflydescribeshowanMNC’stranslationexposurecanbereduc
2、ed.Yet,Itisadvisedthatthelimitationsofhedgingtranslationexposurereceivesasmuchattentionasthehedgingstrategyitself.3EconomicExposureEconomicexposurereferstotheimpactexchangeratefluctuationscanhaveonafirm’sfuturecashflows.Recallthatcorporatecashflowscanbeaf
3、fectedbyexchangeratemovementsinwaysnotdirectlyassociatedwithforeigntransactions.4EconomicExposureExchangeratechangesareoftenlinkedtovariabilityinrealgrowth,inflation,interestrates,governmentalactions,…thechangesmaycausefirmstoadjusttheirfinancingandoperat
4、ingstrategies.TheimportanceofmanagingeconomicexposurecanbeseenfromthecaseofthebankruptcyofLakerAirways,andfromthethe1997-98Asiancrisis.5HowFinancialMarketsAffectedLakerAirlinesLakerAirwaysisaBritishairlinethatgeneratedmuchofitsrevenueinBritishpounds,alarg
5、eproportionofitsexpenses(suchasfuel,oil,anddebtpayments),however,weredenominatedindollars.Asthedollarstrengthenedintheforeignexchangemarketin1981,Lakerneededlargeramountsinpoundstocoveritsdollar-denominatedexpenses.InJanuary1981,Lakerborrowed$131millionsi
6、nthefinancialmarketsfromagroupofU.S.andEuropeanbanks.ThedebtwasdenominatedinU.SdollarsandthereforehadtoberepaidinU.S.dollars.Laker’sdecision6HowFinancialMarketsAffectedLakerAirlinestoobtaindollar-denominateddebtinthefinancialmarketsfurtherincreaseditsecon
7、omicexposure.Asthedollarcontinuedtostrengthen,thefirm’srevenuescouldnotadequatelycoveritsdollar-denominatedexpenses.Consequently,LakerAirwayswentbankrupt.Itmighthaveavoidedbankruptcyifithadreduceditseconomicexposure,eitherbyreducingitsdollar-denominatedex
8、pensesorbyincreasingitsdollar-denominatedrevenue.Overall,Laker’sperformancewasaffectedbyconditionsintheforeignexchangemarketalongwithitsdecisiontoborrowdollarsinthedebtmarket.7EconomicExposureAfirmcanassessitseconom
