Risk Management Strategy Intermediate-Run

1. Risk Management StrategyIntermediate-Run Presented by Anh Nguyen International Financial Management

2. The Intermediate Run • Moderate exchange rate volatility • Deviations from PPP and UIP exist • Economic exposure • Nature of exchange risk presented by real exchange rate changes • Hedging: not a viable approach to managing exchange risk -> Operations management

3. Operational Strategies • Marketing management • Production management • Pre-planned flexibility • Fast, active response to exchange rate signals • Financial management

4. Managing Cash Flow Exposure:Marketing Management • Increase sales in countries where the currency is overvalued • Pre-arranged flexibility is important • Product design and development • Introduce new products where currency is overvalued • Focus on high-volume or high-margin products where currency is undervalued • Pricing strategy

5. Managing Cash Flow Exposure:Production Management • Increase production in countries where the currency is undervalued • Source input components from countries where exchange rate is low • Changes in the production process • Invest in new technology and other efforts where currency is low • Locate plant where currency is undervalued

6. Managing Net Worth Exposure:Financial Management • Offset cash flow exposure • Appropriate long-term debt policy • Balance sheet hedge

7. Exercises • Example 10.2 (pg. 340) • Question 9 (pg. 349)

8. True or False? • In response to a local currency depreciation, a multinational should increase marketing efforts to sell more output and recover profit.

9. True or False? • Multinational corporations hedge because their stockholders cannot.

10. True or False? • Management of financial risk creates value.