CHAPTER 11 MANAGING ECONOMIC EXPOSURE

CHAPTER OVERVIEW I.An Overview of Operating Exposure Management II.Marketing Management of Exchange Risk III.Production Management of Exchange Risk IV.Financial Management of Exchange Risk

Part I.An Overview of Operating Exposure Management I.INTRODUCTION Operating exposure management requires long-term operating adjustments. A. Real v. Nominal Changes 1. Relative price changes leads to marketing and/or production revisions

An Overview of Operating Exposure Management B.Proactive Marketing and Production Initiatives 1.Marketing: market selection product strategy pricing strategy promotional strategy

An Overview of Operating Exposure Management B.Proactive Marketing and Production Initiatives (con’t) 2.Production: product sourcing input mix plant location raising productivity

Part II.Marketing Management of Exchange Risk II.Marketing Management Adjustments A. Market Selection 1.use advantage to carve out market share 2.Market segmentation

Marketing Management of Exchange Risk B.Pricing strategy: Expectations critical 1.If HC value falls, exporter gains competitive advantage by increasing unit profitability and market share. 2.The higher price elasticity of demand, the more currency risk the firm faces by product substitution.

Marketing Management of Exchange Risk 3.Following HC depreciation, local firm may have much more freedom in its pricing. C.Promotional Strategy

Marketing Management of Exchange Risk D.Product Strategy exchange rate changes may alter 1.The timing of new product introductions, 2.Product deletion, 3.Product innovation.

Part III. Production Management of Exchange Risk III.Product Management Adjustments product sourcing and plant location are the principal variables to manipulate. A.Input mix B.Shift production among plants C.Plant location D.Raising productivity

Production Management of Exchange Risk IV.Planning For Exchange-Rate Changes A.With better planning and more competitive options, firms can change strategies substantially B.before the impact of an currency change makes itself felt. C.Implication: compaction of adjustment period following an exchange-rate change.

IV.Financial Management of Exchange Risk V.Financial Management of Exchange Rate Risk: Financial manager’s Role in Marketing and Production A.Provide local manager with fore- casts of inflation and exchange- rate changes. B.Identify and focus on competitive exposure.

Financial Management of Exchange Risk C.Design the evaluation criteria so that operating managers neither rewarded or penalized for unexpected exchange-rate changes. D.Estimate and hedge the operating exposure after adjustments made.