Microsoft Word - Money, Banking, and Int Finance(scribd).docx

Money, Banking, and International Finance

Technique 2: A company outsources its production or uses low-cost labor. For instance,
many hotels and restaurants operate in extremely competitive markets as they compete in prices
to attract consumers. Consequently, hotels and restaurants, located in countries with an
appreciating currency rely on immigrants or even undocumented workers to reduce both its
costs and prices. In another example, Foxconn, a Taiwanese company, is the largest electronics
company in the world, and it produces electronic devices for some of the world's largest
corporations, such as the Ipad, Iphone, Ipod, Kindle, PlayStation 3, and X-box.
Technique 3: A company can diversify its products and services by selling to consumers
around the world. For example, many U.S. corporations produce and market fast food, snack
food, and sodas in many around the world. Although the weakening U.S. dollar reduces the
companies' profits inside the United States, their foreign operations offset the depreciating dollar
and sustain their profits.
Technique 4: A company continually invests in research and development. Subsequently, it
offers innovative products that consumers want. For instance, Apple Inc. set the standard for
high-quality smart phones and tablet computers. Although Apple sells its products in a country
with a depreciating currency, it possesses some monopoly power to raise its products' prices
without reducing its sales.
Technique 5 : A company can use derivatives and hedge against exchange rate changes. For
example, Porsche completely manufactures its cars within the European Union and sells
between 40 to 45% of its cars to the United States. The U.S. dollar was depreciating against the
euro until 2008. Consequently, the depreciating U.S. dollar reduced its U.S. sales while its costs
rose. Thus, the Porsche financial managers hedged or shorted against the U.S. dollar, and some
financial analysts estimated 50% of Porsche's profits came from its hedging activities.

Key Terms

Exposure
transaction exposure
economic exposure
translation exposure

tax exposure

Forex Beta

Exposure Coefficient

Chapter Questions

1. Define the four types of exposure.


2. You are expanding a resort business in Mexico. You accept pesos for payment but purchase
   all your supplies from the United States. Identify your company's exposure if the U.S. dollar
   appreciates against relative to the Mexican peso.


3. You operate a hotel in Europe. You market your hotel to Americans who pay in dollars, but
   you purchase all your supplies in Europe. These transactions will occur in 30 days, and the
   spot currency exchange rate equals $1.25 per euro. Moreover, you expect the U.S. dollar-