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Introduction to Economic Exposure

Introduction to Economic Exposure. An exploration of Cash flow Exposure. Failures of other Methods. Translation exposure : ignores all off balance-sheet commitments and includes fixed assets that are not associated with cash flows . Failures of other Methods cont.

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Introduction to Economic Exposure

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  1. Introduction to Economic Exposure An exploration of Cash flow Exposure

  2. Failures of other Methods • Translation exposure: ignores all off balance-sheet commitments and includes fixed assets that are not associated with cash flows

  3. Failures of other Methods cont. • Transaction exposure: does not recognize ongoing operations (that might be going on in the background for ex) and ignores changes in valuation of assets and inventories. • Both these methods focus on nominal exchange rate changes without evaluation of inflation.

  4. Economic Exposure • Economic exposure tries to look at the real change in the market value of a firm as exchange rates change. • It explores these concepts this through the topics of Net Worth Exposure and Cash Flow Exposure.

  5. Cash Flow Exposure Case 1 • Self contained subsidiary sells its products in a local market. • Experiences a devaluation of the local currency.

  6. Cash Flow Exposure Case 2 • A subsidiary that competes in a world output market that is able to sell at a constant dollar/world price. • Experiences a devaluation of the local currency.

  7. Cash Flow Exposure Case 3 • A Subsidiary sells in a local market but faces a world market for inputs. • Experiences a devaluation of the local currency.

  8. Net Worth Exposure • Also called Economic Balance Sheet Exposure • This type of analysis looks into the real net asset positions, or market value of total assets net of the market value of total liabilities as it is affected by exchange rate change.

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