MEASURING EXPOSURE TO EXCHANGE RATE FLUCTUATIONS

Types of Exposure ► TRANSACTION ► ECONOMIC ► TRANSLATION

TRANSACTION EXPOSURE EXPOSURE

DEFINITION

CONSOLIDATED NET CASH FLOW ASSESSMENT currencyTotalinflowTotaloutflow Net inflow Or outflow CurrentExchangeRate Net inflow or Outflow as measured in US dollar C $ C $ 2 M 6 M 4 M $ 0.80 $ 0.80 $ 3.2M OUTFLOW EEURO 11 M 12 M 1 M MOUTFLOW JAPAN Y 300 M 100 M 200 M MINFLOW SWISSFRANC 1 M 7 M 6 M MOUTFLOW

ESTIMATING THE RANGE OF NET INFLOW & OUTFLOWS IN EACH CURRENCY CURRENCY NET INFLOW OR OUTFLOW RANGE OF POSSIBLE EXCHANGE RATE AT THE PERIOD RANGE OF POSSIBLE NET INFLOWS OR OUTFLOWS IN US $ BASED ON RANGE OF POSSIBLE EX-RATES C $ 4 M INFLOW $.75 TO.85 $ 3 M TO 3.4 EURO 1 M OUTFLOW.20 TO M TO.50 JAPAN Y 200 M INFLOW.004 TO M TO 1.2 SWISSFRANC 6 M OUTFLOW.40 TO M TO 4.2

CURRENCY VARIABILITY ( STANDARD DEVIATION ) CURRENCY USD % 1.2%1.5%1.8%1.6% GBP EUR JPY

CURRENCY CORRELATION CURRENCYPAIR USDGBPCADJPY GBPUSDCADJPY CADUSDGBPJPY JPYUSDGBPCAD

CORRELATION X %CHANGE Y %CHANGE Y Z TIME PERIOD TIME PERIOD

ECONOMICEXPOSURE

DEFINITION

FORMS OF ECONOMIC EXPOSURE TO EXCHANGE RATE FLUCTUATION VARIABLES THAT INFLUENCE THE LOCAL CURRENCY INFLOWS IMPACT OF LOCAL CURRENCY APPRECIATION IMPACT OF LOCAL CURRENCY DEPPRECIATION LOCAL SALES (RELATIVE TO FOREIGN COMPETITION IN LOCAL MARKETS) FIRM’S EXPORTS DENOMINATED IN LOCAL CURRENCY FIRM’S EXPORTS DENOMINATED IN FOREIGN CURRENCY INTEREST RECEIVED FROM FOREIGN INVESTMENTS VARIABLES THAT INFLUENCE THE LOCAL CURRENCY OUTFLOWS FIRM’S IMPORTED SUPPLIES (DENOMITED IN LOCAL CURRENCY) NO CHANGE NO CHANGE FIRM’S IMPORTED SUPPLIES (DENOMITED IN FOREIGN CURRFENCY) INTEREST OWED ON FOREIGN FUNDS BORROWED

APPRECIATION VARIABLES THAT INFLUENCE THE LOCAL CURRENCY INFLOWS LOCAL SALES (RELATIVE TO FOREIGN COMPETITION IN LOCAL MARKETS). CONSUMERS OF PAKISTAN WILL START BUYING FOREIGN PRODUCTS BECAUSE HOME CURRENCY HAS BECAME STRONGER THEREFORE LOCAL SALES WILL DECLINE AND AS A RESULT THE INFLOW WILL DECLINE

FIRM’S EXPORTS DENOMINATED IN LOCAL CURRENCY DENOMINATED IN LOCAL CURRENCY FOR THE FOREIGNERS IMPORTS BECAME EXPENSIVE BECAUSE PAKISTANI CURRENCY HAS STRENGTHEN SO FOREIGN IMPORTERS WILL STOP BUYING PAKISTANI PRODUCTS THEREFORE THE EXPORTS WILL DECLINE AND AS A RESULT INFLOWS WILL DECLINE

FIRM’S EXPORTS DENOMINATED IN FOREIGN CURRENCY DENOMINATED IN FOREIGN CURRENCY WHEN PAKISTANI EXPORTER CONVERTS FOREIGN CURRENCY RECEIVED FROM EXPORTS IT WILL GET A FEW UNITS OF PAK RS BECAUSE HOME CURRENCY HAS APPRECIATED EXPORTS WILL NOT DECLINE BUT THE LOCAL CURRENCY INFLOWS WILL DECLINE

INTEREST RECEIVED FROM FOREIGN INVESTMENTS FROM FOREIGN INVESTMENTS WHEN PAKISTANI INVESTORS CONVERT FOREIGN CURRENCY RECEIVED AS INTEREST OR DIVIDENDS IT WILL GET A FEW UNITS OF PAK RS WHEN PAKISTANI INVESTORS CONVERT FOREIGN CURRENCY RECEIVED AS INTEREST OR DIVIDENDS IT WILL GET A FEW UNITS OF PAK RS BECAUSE HOME CURRENCY HAS APPRECIATED AMOUNT OF INTEREST IN FOREIGN CURRENCY WILL NOT DECLINE BUT THE LOCAL CURRENCY INFLOWS WILL DECLINE

APPRECIATION VARIABLES THAT INFLUENCE THE LOCAL CURRENCY OUTFLOWS FIRM’S IMPORTED SUPPLIES (DENOMITED IN LOCAL CURRENCY) (DENOMITED IN LOCAL CURRENCY) THERE WILL BE NO EFFECT BECAUSE PAKISTANI RS APPRECIATION WILL NOT EVEN INCREASE OR DECREASE THE OUTFLOW INCREASE OR DECREASE THE OUTFLOW HENCE THE OUTFLOW WILL REMAIN SAME

FIRM’S IMPORTED SUPPLIES (DENOMITED IN FOREIGN CURRFENCY) NOW YOU WILL PAY LESS MONEY FOR IMPORTS BECAUSE PAK RS HAS STRENGTHEN YOU WILL TAKE FEW UNITS OF PAK RS AND RECEIVE MORE UNITS OF FOREIGN CURRENCY HENCE THE PAK RS OUTFLOW WILL DECLINE

INTEREST OWED ON FOREIGN FUNDS BORROWED NOW YOU WILL PAY LESS MONEY IN INTEREST ( INTEREST REMAINS THE SAME ) BECAUSE PAK RS HAS STRENGTHEN YOU WILL TAKE FEW UNITS OF PAK RS AND RECEIVE MORE UNITS OF FOREIGN CURRENCY HENCE THE PAK RS OUTFLOW WILL DECLINE

DEPRECIATION VARIABLES THAT INFLUENCE THE LOCAL CURRENCY INFLOWS LOCAL SALES (RELATIVE TO FOREIGN COMPETITION IN LOCAL MARKETS. CONSUMERS OF PAKISTAN WILL START BUYING LOCAL PRODUCTS BECAUSE HOME CURRENCY HAS BECAME WEAKER THEREFORE LOCAL SALES WILL INCREASE AND AS A RESULT THE INFLOW WILL INCREASE

FIRM’S EXPORTS DENOMINATED IN LOCAL CURRENCY FOR THE FOREIGNERS IMPORTS BECAME CHEAPER BECAUSE PAKISTANI CURRENCY HAS WEAKENED SO FOREIGN IMPORTERS WILL START BUYING MORE PAKISTANI PRODUCTS THEREFORE THE EXPORTS WILL INCREASE AND AS A RESULT INFLOWS WILL INCREASE

FIRM’S EXPORTS DENOMINATED IN FOREIGN CURRENCY WHEN PAKISTANI EXPORTER CONVERTS FOREIGN CURRENCY RECEIVED FROM EXPORTS IT WILL GET MORE UNITS OF PAK RS WHEN PAKISTANI EXPORTER CONVERTS FOREIGN CURRENCY RECEIVED FROM EXPORTS IT WILL GET MORE UNITS OF PAK RS BECAUSE FOREIGN CURRENCY HAS STRENGTHEN EXPORTS WILL REMAIN SAME BUT THE LOCAL CURRENCY INFLOWS WILL INCREASE

INTEREST RECEIVED FROM FOREIGN INVESTMENTS WHEN PAKISTANI INVESTORS CONVERT FOREIGN CURRENCY RECEIVED AS INTEREST OR DIVIDENDS IT WILL GET MORE UNITS OF PAK RS WHEN PAKISTANI INVESTORS CONVERT FOREIGN CURRENCY RECEIVED AS INTEREST OR DIVIDENDS IT WILL GET MORE UNITS OF PAK RS BECAUSE FOREIGN CURRENCY HAS BECOME STRONGER AMOUNT OF INTEREST IN FOREIGN CURRENCY WILL NOT CHANGE BUT THE LOCAL CURRENCY INFLOWS WILL INCREASE

DEPRECIATION VARIABLES THAT INFLUENCE THE LOCAL CURRENCY OUTFLOWS FIRM’S IMPORTED SUPPLIES (DENOMITED IN LOCAL CURRENCY) THERE WILL BE NO EFFECT BECAUSE PAKISTANI RS DEPRECIATION WILL NOT EVEN INCREASE OR DECREASE THE OUTFLOWS INCREASE OR DECREASE THE OUTFLOWS HENCE THE OUTFLOWS WILL REMAIN SAME

FIRM’S IMPORTED SUPPLIES (DENOMITED IN FOREIGN CURRFENCY) NOW YOU WILL PAY MORE MONEY FOR IMPORTS BECAUSE PAK RS HAS WEAKENED YOU WILL TAKE MORE UNITS OF PAK RS AND RECEIVE LESS UNITS OF FOREIGN CURRENCY HENCE THE PAK RS OUTFLOWS WILL INCREASE

INTEREST OWED ON FOREIGN FUNDS BORROWED ON FOREIGN FUNDS BORROWED NOW YOU WILL PAY MORE MONEY IN INTEREST ( INTEREST REMAINS THE SAME ) BECAUSE PAK RS HAS WEAKENED YOU WILL TAKE MORE UNITS OF PAK RS AND RECEIVE LESS UNITS OF FOREIGN CURRENCY HENCE THE PAK RS OUTFLOW WILL INCREASE

INDIRECT ECONOMIC EXPOSURE

ECONOMIC EXPOSURE OF DOMESTIC FIRM

ECONOMIC EXPOSURE OF MNC

Measuring ECONOMIC EXPOSURE

EVALUATION OF MNC’S SENSITIVITY TO EXCHANGE RATE ► Regression Analysis could help to determine whether a particular policy has : ► Reduced Or Or ► Increased ► MNC s exposure

a REGRESSION ANALISIS r s = a o + a 1 PAK- SI + a 2 E r s = a o + a 1 PAK- SI + a 2 EWhere: r s = % change in the stock price of the company r s = % change in the stock price of the company PAK-SI = % change in Pak stock Index PAK-SI = % change in Pak stock Index E = % change in foreign currency E = % change in foreign currency Regression coefficients : a o = Constant a o = Constant a 1 = % change in company value sensitivity to % change in PAK-IS a 1 = % change in company value sensitivity to % change in PAK-IS a 2 = % change in company value sensitivity to % change in E a 2 = % change in company value sensitivity to % change in E

a SENSETIVITY OF A COMPANY’S STOCK VALUE TO CURRENCY MOVEMENTS BASED ON REGRESSION ANALYSIS CURRENCY REGRESSION COEFFICIENT a 2 EARLIER SUBPERIOD REGRESSION COEFFICIENT a 2 MORE RECENT SUBPERIOD CANADIAN $ FRENCH FRANC EURO C JAPAN Y

a 2 a 2 ► 1 % change in foreign currency ► will provide : ► 0.81 % change (in opposite direction) ► in the value of the company

b REGRESSION ANALISIS r s = b o + b 1 PAK- SI + b 2 CAD + b 3 USD + b 4 GBP + b 5 EUR r s = b o + b 1 PAK- SI + b 2 CAD + b 3 USD + b 4 GBP + b 5 EURWhere: r s = % change in the stock price of the company r s = % change in the stock price of the company PAK-SI = % change in Pak stock Index PAK-SI = % change in Pak stock Index CAD, USD, GBP, EUR = % change in foreign currency CAD, USD, GBP, EUR = % change in foreign currency Regression coefficients : b o = Constant b o = Constant b 1 = % change in company value sensitive to % change in PAK-IS b 1 = % change in company value sensitive to % change in PAK-IS b 2 = % change in company value sensitive to % change in Foreign currency b 2 = % change in company value sensitive to % change in Foreign currency

b SENSETIVITY OF A COUNTRY’S STOCK VALUE TO COUNTRY ECONOMIES BASED ON REGRESSION ANALYSIS STOCK INDEX OF : REGRESSION COEFFICIENT EARLIER SUBPERIOD REGRESSION COEFFICIENT MORE RECENT SUBPERIOD CANADIAN $ FRENCH FRANC EURO C JAPAN Y

To assess how the MNC is influenced by economic conditions of foreign countries ► The result will indicate a Company’s economic exposure due to the change in the economic conditions of each country. ► There are several possibilities :  GNP  NI But these variables do not indicate anticipated future conditions of economy But these variables do not indicate anticipated future conditions of economy So the best measure is the foreign country’s stock index So the best measure is the foreign country’s stock index

C REGRESSION ANALISIS r s = c o + c 1 HI + c 2 FI r s = c o + c 1 HI + c 2 FIWhere: r s = Return of the company’s stock r s = Return of the company’s stock HI = the return on the home stock Index HI = the return on the home stock Index FI = the return on the foreign stock Index FI = the return on the foreign stock Index Regression coefficients : c o = Constant c o = Constant c 1 = % change in company value sensitive to % change in home-IS c 1 = % change in company value sensitive to % change in home-IS c 2 = % change in company value sensitive to % change in foreign-IS c 2 = % change in company value sensitive to % change in foreign-IS

TRANSLATION EXPOSURE

DEF : “The exposure of the MNC s consolidated financial statements to exchange rate fluctuation is known as accounting or translation exposure”

► The MNC s where great business is conducted in foreign subsidiaries Then ► Higher will be the chance of translation exposure ► The MNC s where foreign business is in the shape of exports Then ► Less will be the chance of translation exposure

EXCHANGE RATES USED IN VARIOUS TRANSLATION METHODS (C=current, H=historical) ACCOUNTS TITLES CURRENT NON- CURRENT TEMPORALMONETARYNON-MONETARYCURRENT CASH CURRENT RECEIVABLES & PAYBLESCCCC INVENTORYC C or H HC FIXED ASSENTS LONG-TERM HHHC RECEIVABLES & PAYABLES HCCC