International Finance: Putting Theory Into Practice

13.3. MEASURING AND HEDGING OF OPERATING EXPOSURE 501

Table 13.1:Joint distribution ofS ̃TandCF ̃ Tfor the Freedonian Subsidiary

boom: CF∗= 150 bust : CF∗= 100 E(V ̃T|ST)

ST= 1. 2 150 × 1 .2 = 180 100 × 1 .2 = 120^180 × 00 ..15+015+120. 35 ×^0.^35 =gbp 138

p= 0. 15 p= 0. 35 p= 0. 50

ST= 0. 8 150 × 0 .8 = 120 100 × 0 .8 = 80^120 × 00 ..35+035+80. 15 ×^0.^15 =gbp 108

p= 0. 35 p= 0. 15 p= 0. 50

p= 0. 50 p= 0. 50

180 CF in HC

80

exposure

line

120

138

108

ST

0. (^81). 2
   o o
   o
   o
   180 CF in HC
   80
   120
   ST


1. (^81). 2
   o
   o
   o
   o
   The above examples are all about short-term exposures. By short term we mean,
   like in micro-economics, that the investments (P&E) are given; no major expansion
   or downsizing or relocation is being considered. Recall the example whereVWwas
   revising its marketing and pricing policies in light of thedem/usdexchange rate.
   These were short-term reactions. ButVW’s reaction did become “long-term” when it
   considered moving its production abroad. In the late 70s, it effectively built factories
   in Brazil, Mexico and theus.
   Figure 13.3:Bourbonnaise des Eaux’s Option to Export Mineral Water
   S
   CFT
   Export
   Sell at home
   T