彼得罗斯公司理财Cap031.pptVIP

Foreign Currency Approach Use the same information as the previous example to estimate the NPV using the Foreign Currency Approach Mexican inflation rate from the International Fisher Effect is 8% - 4% = 4% Required Return = 15% + 4% = 19% PV of future cash flows = 6,879,679 NPV = 6,879,679 – 9,000,000 = -2,120,321 pesos NPV = -2,120,321 / 9.08 = -233,516 31.6 Exchange Rate Risk Short-Term Exposure Long-Term Exposure Translation Exposure Short-Term Exposure Risk from day-to-day fluctuations in exchange rates and the fact that companies have contracts to buy and sell goods in the short run at fixed prices Managing risk Enter into a forward agreement to guarantee the exchange rate. Use foreign currency options to lock in exchange rates if they move against you, but benefit from rates if they move in your favor. Long-Term Exposure Long-run fluctuations come from unanticipated changes in relative economic conditions Could be due to changes in labor markets or governments More difficult to hedge Try to match long-run inflows and outflows in the currency Borrowing in the foreign country may mitigate some of the problems Translation Exposure Income from foreign operations must be translated back to U.S. dollars for accounting purposes, even if foreign currency is not actually converted back to dollars. If gains and losses from this translation flowed through directly to the income statement, there would be significant volatility in EPS. Current accounting regulations require that all cash flows be converted at the prevailing exchange rates, with currency gains and losses accumulated in a special account within shareholders equity. Managing Exchange Rate Risk Large multinational firms may need to manage the exchange rate risk associated with several different currencies. The firm needs to consider its net exposure to currency risk instead of just looking at each currency separately. Hedging individual currencies could be expensive and may actually increase exposure. 31.7 Po