Chapter 10 (Final Exam) Flashcards
Why is exchange rate risk relevant for MNCs?
Exchange rate movements can negatively affect an MNC’s cash flows, earnings, and stock valuation.
What are the three types of exchange rate exposure?
Transaction exposure: Impact on contractual cash flows.
Economic exposure: Impact on overall cash flows.
Translation exposure: Impact on consolidated financial statements.
What is transaction exposure?
It measures how sensitive an MNC’s contractual cash flows (e.g., receivables/payables) are to exchange rate changes.
How is transaction exposure assessed?
By estimating net cash flows in various currencies and analyzing currency volatility and correlations.
What is Value at Risk (VaR) in transaction exposure?
It estimates the potential maximum loss from exchange rate movements over a specific period.
What are the limitations of VaR?
Assumes exchange rate movements are normally distributed.
Past volatility may not reflect future conditions.
What is economic exposure?
It measures how a firm’s overall cash flows are affected by exchange rate movements, including operating cash flows.
How is economic exposure assessed?
By forecasting cash flows under different exchange rate scenarios and using regression analysis to quantify impacts.
What is translation exposure?
It measures the impact of exchange rate movements on an MNC’s consolidated financial statements.
What factors influence translation exposure?
Percentage of business conducted by foreign subsidiaries.
Location of subsidiaries.
Accounting methods (e.g., FASB 52 guidelines).
How does translation exposure affect MNC stock prices?
Changes in exchange rates can influence consolidated earnings, which in turn affect stock valuations and managerial compensation.
Why do MNCs measure exchange rate exposure?
To decide whether and how to hedge risks and stabilize cash flows and earnings.
