Exam 9: Management of Economic Exposure

S.firm has an asset in Britain whose local currency price is random.For simplicity,suppose there are only three states of the world and each state is equally likely to occur.The future local currency price of this British asset (P*)as well as the future exchange rate (S)will be determined,depending on the realized state of the world. State Probability S S\times 1/3 £980 \ 1.40/£ \ 1,372 1/3 £1,000 \ 1.50/£ \ 1,500 1/3 £1,070 \ 1.60/£ \ 1,712 Which of the following statements is most correct?

What is the objective of managing operating exposure?

A firm's operating exposure is

Which of the following are identified by your text as a strategy for managing operating exposure: 1)Selecting low-cost production sites 2)Flexible sourcing policy 3)Diversification of the market. 4)Product differentiation and R&D efforts 5)Financial Hedging.

The firm may not be subject to high degrees of operating exposure

A firm with a highly elastic demand for its products

The variance of the exchange rate is:

The mechanism for this includes

The variability of the dollar value of an asset (invested overseas)depends on

Estimate your exposure (b)to the exchange risk.

On the basis of regression Equation $P = a + b \times S + e$ we can decompose the variability of the dollar value of the asset,Var(P),into two separate components Var(P)= b² * Var(S)+ Var(e) The second term in the right-hand side of the equation,Var(e)represents

The firm may not be able to pass through changes in the exchange rate

A purely domestic firm that sources and sells only domestically,

Generally speaking,when both a firm's costs and its price is sensitive to exchange rate changes

A foreign country could provide low cost production sites

The exposure coefficient $b = \frac { \operatorname { Cov } ( P , S ) } { \operatorname { Var } ( S ) }$ in the regression $P = a + b \times S + e$ informs

The variance of the exchange rate is:

Developing multiple production sites in a variety of countries,

Discuss how you can hedge your exchange risk exposure and also examine the consequences of hedging.

Consider a U.S.MNC who owns a foreign asset.If the foreign currency value of the asset is inversely related to changes in the dollar-foreign currency exchange rate,