Risk Management StrategyIntermediate-Run.ppt

Risk Management StrategyIntermediate-Run Presented by Anh Nguyen International Financial Management The Intermediate Run Moderate exchange rate volatility Deviations from PPP and UIP exist Economic exposure Nature of exchange risk presented by real exchange rate changes Hedging: not a viable approach to managing exchange risk - Operations management Operational Strategies Marketing management Production management Pre-planned flexibility Fast, active response to exchange rate signals Financial management Managing Cash Flow Exposure:Marketing Management Increase sales in countries where the currency is overvalued Pre-arranged flexibility is important Product design and development Introduce new products where currency is overvalued Focus on high-volume or high-margin products where currency is undervalued Pricing strategy Managing Cash Flow Exposure:Production Management Increase production in countries where the currency is undervalued Source input components from countries where exchange rate is low Changes in the production process Invest in new technology and other efforts where currency is low Locate plant where currency is undervalued Managing Net Worth Exposure:Financial Management Offset cash flow exposure Appropriate long-term debt policy Balance sheet hedge Exercises Example 10.2 (pg. 340) Question 9 (pg. 349) True or False? In response to a local currency depreciation, a multinational should increase marketing efforts to sell more output and recover profit. True or False? Multinational corporations hedge because their stockholders cannot. True or False? Management of financial risk creates value. In the intermediate run, foreign exchange risk requires operation responses because short-term solutions expire. Managers should worry about economic exposure in the intermediate run because economic exposure captures the firm’s competitive position with respect to real exchange rate changes. The nature of exchange risk can be represented by real exch