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Chapter 10
Measuring Exposure to Exchange Rate Fluctuations
Lecture Outline
Relevance of Exchange Rate Risk
Transaction Exposure
Estimating “Net” Cash Flows in Each Currency
Transaction Exposure of an MNC’s Portfolio
Transaction Exposure Based on Vale-at-Risk
Economic Exposure
Economic Exposure to Local Currency Appreciation
Economic Exposure to Local Currency Depreciation
Measuring Economic Exposure
Translation Exposure
Determinants of Translation Exposure
Exposure of an MNC's Stock Price to Translation Effects
Chapter Theme
This chapter distinguishes among three forms by which MNCs are exposed to exchange rate risk:
(1) transaction exposure, (2) economic exposure, and (3) translation exposure. Each firm differs in degree
of exposure. A firm should be able to measure its degree of each type of exposure as described in this
chapter. Then, it can decide how to cover that exposure using methods described in the following two
chapters.
Topics to Stimulate Class Discussion
1. Describe in general terms how you would measure the transaction exposure of a particular MNC.
2. What is the relationship between transaction exposure and economic exposure?
3. A small firm in New York City produces various metals and sells them to local manufacturers. It has
no foreign sales and purchases all supplies and materials locally. Does transaction exposure exist for
this firm? Does economic exposure exist for this firm?
