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MEASURING EXPOSURE TO EXCHANGE RATE FLUCTUATIONS

MEASURING EXPOSURE TO EXCHANGE RATE FLUCTUATIONS. Types of Exposure. TRANSACTION ECONOMIC TRANSLATION. TRANSACTION EXPOSURE. DEFINITION. CONSOLIDATED NET CASH FLOW ASSESSMENT. ESTIMATING THE RANGE OF NET INFLOW & OUTFLOWS IN EACH CURRENCY. CURRENCY VARIABILITY ( STANDARD DEVIATION ).

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MEASURING EXPOSURE TO EXCHANGE RATE FLUCTUATIONS

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  1. MEASURING EXPOSURE TO EXCHANGE RATE FLUCTUATIONS

  2. Types of Exposure • TRANSACTION • ECONOMIC • TRANSLATION

  3. TRANSACTION EXPOSURE

  4. DEFINITION

  5. CONSOLIDATED NET CASH FLOW ASSESSMENT

  6. ESTIMATING THE RANGE OF NET INFLOW & OUTFLOWS IN EACH CURRENCY

  7. CURRENCY VARIABILITY(STANDARD DEVIATION)

  8. CURRENCY CORRELATION

  9. CORRELATION X %CHANGE Y Z TIME PERIOD

  10. ECONOMIC EXPOSURE

  11. DEFINITION

  12. FORMS OF ECONOMIC EXPOSURE TO EXCHANGE RATE FLUCTUATION

  13. APPRECIATIONVARIABLES THAT INFLUENCE THE LOCAL CURRENCY INFLOWS LOCAL SALES (RELATIVE TO FOREIGN COMPETITION IN LOCAL MARKETS) . CONSUMERS OF PAKISTAN WILL START BUYING FOREIGN PRODUCTS BECAUSE HOME CURRENCY HAS BECAME STRONGER THEREFORE LOCAL SALES WILL DECLINE AND AS A RESULT THE INFLOW WILL DECLINE

  14. FIRM’S EXPORTS DENOMINATED IN LOCAL CURRENCY FOR THE FOREIGNERS IMPORTS BECAME EXPENSIVE BECAUSE PAKISTANI CURRENCY HAS STRENGTHEN SO FOREIGN IMPORTERS WILL STOP BUYING PAKISTANI PRODUCTS THEREFORE THE EXPORTS WILL DECLINE AND AS A RESULT INFLOWS WILL DECLINE

  15. FIRM’S EXPORTS DENOMINATED IN FOREIGN CURRENCY WHEN PAKISTANI EXPORTER CONVERTS FOREIGN CURRENCY RECEIVED FROM EXPORTS IT WILL GET A FEW UNITS OF PAK RS BECAUSE HOME CURRENCY HAS APPRECIATED EXPORTS WILL NOT DECLINE BUT THE LOCAL CURRENCY INFLOWS WILL DECLINE

  16. INTEREST RECEIVED FROM FOREIGN INVESTMENTS WHEN PAKISTANI INVESTORS CONVERT FOREIGN CURRENCY RECEIVED AS INTEREST OR DIVIDENDS IT WILL GET A FEW UNITS OF PAK RS BECAUSE HOME CURRENCY HAS APPRECIATED AMOUNT OF INTEREST IN FOREIGN CURRENCY WILL NOT DECLINE BUT THE LOCAL CURRENCY INFLOWS WILL DECLINE

  17. APPRECIATIONVARIABLES THAT INFLUENCE THE LOCAL CURRENCY OUTFLOWS FIRM’S IMPORTED SUPPLIES (DENOMITED IN LOCAL CURRENCY) THERE WILL BE NO EFFECT BECAUSE PAKISTANI RS APPRECIATION WILL NOT EVEN INCREASE OR DECREASE THE OUTFLOW HENCE THE OUTFLOW WILL REMAIN SAME

  18. FIRM’S IMPORTED SUPPLIES (DENOMITED IN FOREIGN CURRFENCY) NOW YOU WILL PAY LESS MONEY FOR IMPORTS BECAUSE PAK RS HAS STRENGTHEN YOU WILL TAKE FEW UNITS OF PAK RS AND RECEIVE MORE UNITS OF FOREIGN CURRENCY HENCE THE PAK RS OUTFLOW WILL DECLINE

  19. INTEREST OWED ON FOREIGN FUNDS BORROWED NOW YOU WILL PAY LESS MONEY IN INTEREST (INTEREST REMAINS THE SAME) BECAUSE PAK RS HAS STRENGTHEN YOU WILL TAKE FEW UNITS OF PAK RS AND RECEIVE MORE UNITS OF FOREIGN CURRENCY HENCE THE PAK RS OUTFLOW WILL DECLINE

  20. DEPRECIATIONVARIABLES THAT INFLUENCE THE LOCAL CURRENCY INFLOWS LOCAL SALES (RELATIVE TO FOREIGN COMPETITION IN LOCAL MARKETS . CONSUMERS OF PAKISTAN WILL START BUYING LOCAL PRODUCTS BECAUSE HOME CURRENCY HAS BECAME WEAKER THEREFORE LOCAL SALES WILL INCREASE AND AS A RESULT THE INFLOW WILL INCREASE

  21. FIRM’S EXPORTS DENOMINATED IN LOCAL CURRENCY FOR THE FOREIGNERS IMPORTS BECAME CHEAPER BECAUSE PAKISTANI CURRENCY HAS WEAKENED SO FOREIGN IMPORTERS WILL START BUYING MORE PAKISTANI PRODUCTS THEREFORE THE EXPORTS WILL INCREASE AND AS A RESULT INFLOWS WILL INCREASE

  22. FIRM’S EXPORTS DENOMINATED IN FOREIGN CURRENCY WHEN PAKISTANI EXPORTER CONVERTS FOREIGN CURRENCY RECEIVED FROM EXPORTS IT WILL GET MORE UNITS OF PAK RS BECAUSE FOREIGN CURRENCY HAS STRENGTHEN EXPORTS WILL REMAIN SAME BUT THE LOCAL CURRENCY INFLOWS WILL INCREASE

  23. INTEREST RECEIVED FROM FOREIGN INVESTMENTS WHEN PAKISTANI INVESTORS CONVERT FOREIGN CURRENCY RECEIVED AS INTEREST OR DIVIDENDS IT WILL GET MORE UNITS OF PAK RS BECAUSE FOREIGN CURRENCY HAS BECOME STRONGER AMOUNT OF INTEREST IN FOREIGN CURRENCY WILL NOT CHANGE BUT THE LOCAL CURRENCY INFLOWS WILL INCREASE

  24. DEPRECIATIONVARIABLES THAT INFLUENCE THE LOCAL CURRENCY OUTFLOWS FIRM’S IMPORTED SUPPLIES (DENOMITED IN LOCAL CURRENCY) THERE WILL BE NO EFFECT BECAUSE PAKISTANI RS DEPRECIATION WILL NOT EVEN INCREASE OR DECREASE THE OUTFLOWS HENCE THE OUTFLOWS WILL REMAIN SAME

  25. FIRM’S IMPORTED SUPPLIES (DENOMITED IN FOREIGN CURRFENCY) NOW YOU WILL PAY MORE MONEY FOR IMPORTS BECAUSE PAK RS HAS WEAKENED YOU WILL TAKE MORE UNITS OF PAK RS AND RECEIVE LESS UNITS OF FOREIGN CURRENCY HENCE THE PAK RS OUTFLOWS WILL INCREASE

  26. INTEREST OWED ON FOREIGN FUNDS BORROWED NOW YOU WILL PAY MORE MONEY IN INTEREST (INTEREST REMAINS THE SAME) BECAUSE PAK RS HAS WEAKENED YOU WILL TAKE MORE UNITS OF PAK RS AND RECEIVE LESS UNITS OF FOREIGN CURRENCY HENCE THE PAK RS OUTFLOW WILL INCREASE

  27. INDIRECT ECONOMIC EXPOSURE

  28. ECONOMIC EXPOSURE OF DOMESTIC FIRM

  29. ECONOMIC EXPOSURE OF MNC

  30. Measuring ECONOMIC EXPOSURE

  31. EVALUATION OF MNC’S SENSITIVITY TO EXCHANGE RATE • Regression Analysis could help to determine whether a particular policy has : • Reduced Or • Increased • MNC s exposure

  32. a REGRESSION ANALISIS rs = ao + a1PAK-SI + a2E Where: rs = % change in the stock price of the company PAK-SI = % change in Pak stock Index E= % change in foreign currency Regression coefficients : ao=Constant a1= % change in company value sensitivity to % change in PAK-IS a2=% change in company value sensitivity to % change in E

  33. a SENSETIVITY OF A COMPANY’S STOCK VALUE TO CURRENCY MOVEMENTS BASED ON REGRESSION ANALYSIS

  34. a2 • 1 % change in foreign currency • will provide : • 0.81 % change (in opposite direction) • in the value of the company

  35. b REGRESSION ANALISIS rs = bo + b1PAK-SI + b2 CAD+b3 USD+ b4 GBP+b5 EUR Where: rs = % change in the stock price of the company PAK-SI = % change in Pak stock Index CAD , USD , GBP , EUR = % change in foreign currency Regression coefficients : bo=Constant b1= % change in company value sensitive to % change in PAK-IS b2=% change in company value sensitive to % change in Foreign currency

  36. bSENSETIVITY OF A COUNTRY’S STOCK VALUE TO COUNTRY ECONOMIES BASED ON REGRESSION ANALYSIS

  37. To assess how the MNC is influenced by economic conditions of foreign countries • The result will indicate a Company’s economic exposure due to the change in the economic conditions of each country. • There are several possibilities : • GNP • NI But these variables do not indicate anticipated future conditions of economy So the best measure is the foreign country’s stock index

  38. C REGRESSION ANALISIS rs = co + c1HI + c2FI Where: rs = Return of the company’s stock HI = the return on the home stock Index FI= the return on the foreign stock Index Regression coefficients : co=Constant c1= % change in company value sensitive to % change in home-IS c2=% change in company value sensitive to % change in foreign-IS

  39. TRANSLATION EXPOSURE

  40. DEF : “The exposure of the MNC s consolidated financial statements to exchange rate fluctuation is known as accounting or translation exposure”

  41. The MNC s where great business is conducted in foreign subsidiaries Then • Higher will be the chance of translation exposure • The MNC s where foreign business is in the shape of exports Then • Less will be the chance of translation exposure

  42. EXCHANGE RATES USED IN VARIOUS TRANSLATION METHODS (C=current , H=historical)

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