FX exposures

Question 1

How do you find the value of as MNC

Answer 1

Question 2

What are the notations of this equation ??

Answer 2

Question 3

What are the 4 arguments about FX risks on MNC

Answer 3

1. PPP will take care of it
2. Investors can hedge themselves
3. MNCs are well diversified
4. Stakeholders are well diversified

Question 4

PPP will take care of FX risk

Answer 4

-Over the long run, yes PPP does generally seem to hold
-But not i the short run, MNCs are still exposed to FX risks

Question 5

Investors can hedge themselves to take care of FX risks

Answer 5

Because anyone can invest in a MNC, not everyone has sufficient knowledge and info about corporate exposures to FX risks, and moreover, the capability to hedge those exposures appropriatly

Question 6

MNCs are well diversified so this will take care of FX risks

Answer 6

-If an MNC has operation in everywhere on every product, probably can have the diversification effect (recall the asset pricing course).
-However, can any MNC do that?
-In fact, correlations between FX movements may be quite high and hence, complete offsetting is not possible

Question 7

Stakeholders are well diversified

Answer 7

-Well, if they can invest in everything or supply to every MNC, probably a way to diversify.
-But again, they simply cannot!
Constrained by operation
Constrained by location
Or simply, home bias!

Question 8

What is the key conclusion about FX risks in MNCs ?

Answer 8

Many MNCs have attempted to stabilize their earnings with hedging strategies because they believe exchange rate risk is relevant!!

Question 9

What are MNCs exposed to ??

Answer 9

Transaction exposure
Economic exposure
Translation exposure

Question 10

What is transaction exposure ?

Answer 10

Transaction exposure is the degree to which the value of future cash transactions (contractual) can be affected by exchange rate fluctuations.

Question 11

How do you measure transaction exposure ??

Answer 11