Risk Management Strategy Intermediate-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.