MANAGING ECONOMIC EXPOSURE

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CHAPTER 11

• MANAGING ECONOMIC EXPOSURE

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CHAPTER OVERVIEW

• I. An Overview of Operating Exposure
  Management
• II. Marketing Management of Exchange Risk
• III . Production Management of Exchange Risk
• IV. Financial Management of Exchange Risk

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Part I. An Overview of Operating Exposure
Management

• I. INTRODUCTION
• Operating exposure management requires
• long-term operating adjustments.
• A. Real v. Nominal Changes
• 1. Relative price changes
• leads to marketing and/or
• production revisions

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An Overview of Operating Exposure Management

• B. Proactive Marketing and Production
• Initiatives
• 1. Marketing
• market selection
• product strategy
• pricing strategy
• promotional strategy

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An Overview of Operating Exposure Management

• B. Proactive Marketing and Production
• Initiatives (cont)
• 2. Production
• product sourcing
• input mix
• plant location
• raising productivity

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Part II. Marketing Management of Exchange Risk

• II. Marketing Management Adjustments
• A. Market Selection
• 1. use advantage to carve out market share
• 2. Market segmentation

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Marketing Management of Exchange Risk

• B. Pricing strategy Expectations critical
• 1. If HC value falls, exporter gains
• competitive advantage by increasing unit
  profitability and market share.
• 2. The higher price elasticity of demand,
  the more currency risk
• the firm faces by product substitution.

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Marketing Management of Exchange Risk

• 3. Following HC depreciation, local
• firm may have much more freedom in its
  pricing.
• C. Promotional Strategy

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Marketing Management of Exchange Risk

• D. Product Strategy
• exchange rate changes may alter
• 1. The timing of new product introductions,
• 2. Product deletion ,
• 3. Product innovation.

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Part III. Production Management of Exchange Risk

• III. Product Management Adjustments
• product sourcing and plant location are the
  principal variables to manipulate.
• A. Input mix
• B. Shift production among plants
• C. Plant location
• D. Raising productivity

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Production Management of Exchange Risk

• IV. Planning For Exchange-Rate Changes
• A. With better planning and more competitive
  options, firms can change strategies
  substantially
• B. before the impact of an currency change
  makes itself felt.
• C. Implication compaction of adjustment
  period following an exchange-rate change.

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IV. Financial Management of Exchange Risk

• V. Financial Management of Exchange Rate Risk
  Financial managers Role in Marketing and
  Production
• A. Provide local manager with fore-
• casts of inflation and exchange-
• rate changes.
• B. Identify and focus on competitive exposure.

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Financial Management of Exchange Risk

• C. Design the evaluation criteria so that
  operating managers neither
• rewarded or penalized for
• unexpected exchange-rate
• changes.
• D. Estimate and hedge the operating
• exposure after adjustments made.