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Chapter 12
Managing Economic Exposure and Translation Exposure
Lecture Outline
Managing Economic Exposure
Assessing Economic Exposure
Restructuring to Reduce Economic Exposure
Limitations of Restructuring Intended to Reduce Economic Exposure
A Case Study on Hedging Economic Exposure
Savor Co.’s Assessment of Economic Exposure
Assessment of Each Unit’s Exposure
Identifying the Source of the Unit’s Exposure
Possible Strategies to Hedge Economic Exposure
Savor’s Hedging Strategy
Limitations of Savor’s Hedging Strategy
Managing Exposure to Fixed Assets
Managing Translation Exposure
Using Forward Contracts to Hedge Translation Exposure
Limitations of Hedging Translation Exposure
Chapter Theme
This chapter shows how an MNC can restructure its operations to reduce economic exposure. Such a
strategy is related to the firm's long-run operations.
This chapter also briefly describes how translation exposure can be reduced. Yet, the limitations of
hedging translation exposure should receive as much attention as the hedging strategy itself.
Topics to Stimulate Class Discussion
1. Describe the economic exposure of a specific local small business in your city.
2. Even if you believe translation exposure is relevant, is it worthwhile to hedge it? Explain.
3. Compare the degree of translation exposure between a small firm whose foreign subsidiary generates
50% of its business versus a huge exporting company with no subsidiaries.
