CHAPTER 12
OPERATING EXPOSURE
1. Exposure Definitions. Define operating exposure, economic exposure, and competitive exposure.
Can you provide any insights into what may be behind the use of the different terms?
2. Operating Exposure versus Translation Exposure. What do you see as the primary difference
between operating exposure and translation exposure? Would this have the same meaning to a private
firm as a publicly traded firm?
3. Unexpected Exchange Rate Changes. Why do unexpected exchange rate changes contribute to
operating exposure, but expected exchange rate changes do not?
4. Time Horizon. Explain the time horizons used to analyze and measure unexpected changes in
exchange rates.
5. Static versus Dynamic. What are examples of static exposures versus dynamic exposures?
6. Operating versus Financing Cash Flows. According to financial theory, which is more important
to the value of the firm, financing or operating cash flows?
7. Macroeconomic Uncertainty. Explain how the concept of macroeconomic uncertainty expands the
8. Strategic Response. The objective of both operating and transaction exposure management is to
anticipate and influence the effect of unexpected changes in exchange rates on a firm’s future cash
flows. What strategic alternative policies exist to enable management to manage these exposures?
9. Managing Operating Exposure. The key to managing operating exposure at the strategic level is for
management to recognize a disequilibrium in parity conditions when it occurs and to be pre-
positioned to react most appropriately. How can this task best be accomplished?
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country and reduced in another. The marketing effort can be strengthened in export markets where the
firm’s products have become more price competitive because of the disequilibrium condition.
10. Diversification. How can a multinational firm diversify operations? How can it diversify its
financing? Do you believe these are effective ways of managing operating exposure?
Worldwide diversification in effect prepositions a firm to make a quick response to any loss from
operating exposure. The firm’s own internal cost control system and the alertness of its foreign staff
11. Proactive Management. Operating exposures can be partially managed by adopting operating or
financing policies that offset anticipated foreign exchange exposures. What are four of the most
commonly employed proactive policies?
12. Matching Currency Exposure. Explain how matching currency cash flows can offset operating
exposure.
13. Risk Sharing. An alternative arrangement for managing operating exposure between firms with a
continuing buyer-supplier relationship is risk sharing. Explain how risk sharing works.
14. Back-to-Back Loans. Explain how back-to-back loans can hedge foreign exchange operating
exposure. Would firms have any specific worries about their partner in a back-to-back loan
arrangement?
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(liability side of the balance sheet) and an amount to be received (asset side of the balance sheet) on
the financial statements of each firm.
15. Currency Swaps. Explain how currency swaps can hedge foreign exchange operating exposure.
What are the accounting advantages of currency swaps?
16. Hedging the Unhedgeable. How do some firms attempt to hedge their long-term operation exposure
with contractual hedges? What assumptions do they make in order to justify contractual hedging of
their operating exposure? How effective is such contractual hedging in your opinion?
The ability of firms to hedge the “unhedgeable” depends on predictability: (1) the predictability of the