esm09_operating exposure.ppt
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Transcript esm09_operating exposure.ppt
Operating Exposure
Long-term risk affecting firm value
Managing operating exposure
August 5, 2016
Operating Exposure
1
Operating exposure
exposure to changes in the PV of the
firm
t
NCFt
P0
t 1
1 k wacc
Net Cashflows come from the Income
Statement
August 5, 2016
Operating Exposure
2
Income Statement
Revenues
(Cost of goods sold)
(Operating costs)
(Capital cost allowances)
Incidental income
Incidental expenses
(Taxes)
Net Income
August 5, 2016
Operating Exposure
3
Profit variables
R
P usd ecd ,usd Q
Labour Costs
COGS
Input prices
Overhead
Operating Costs
Administrative costs
August 5, 2016
Operating Exposure
4
Equilibrium case
exchange rates accommodate
changes in relative inflation
relatively low inflation countries
exchange rate appreciates
to accommodate relative inflation
transaction exposure can be hedged
volatility
August 5, 2016
Operating Exposure
5
Disequilibrium case
potential changes in real exchange rates
assume real exchange rate appreciates
Canadian dollar buys more in real terms
transactions exposure is hedged
typically 90 days forward
Continuing exposure beyond 90 days
cannot be hedged
revenues will decrease (Canadian exports)
(and) costs will decrease (Canadian imports)
August 5, 2016
Operating Exposure
6
Causes of disequilibrium
governmental intrusion in normal
goods market activity
tariffs
quotas
subsidies
governmental capital restrictions
movement of capital out of the country
exchange market restrictions
August 5, 2016
Operating Exposure
7
Tariffs
Pe
Qe
August 5, 2016
Operating Exposure
8
Tariffs
marginal cost curve the supply curve
equilibrium where marginal cost equals
marginal revenue
marginal costs curve shifts outward
new equilibrium
higher import prices renders them noncompetitive
August 5, 2016
Operating Exposure
9
Quotas
Pe
Qe
August 5, 2016
Operating Exposure
10
Quotas
government mandates limit to supply
creates a vertical supply curve
well short expected market equilibrium
higher prices for imported products
new equilibrium
higher import prices renders them noncompetitive
August 5, 2016
Operating Exposure
11
Subsidies
Pe
Qe
August 5, 2016
Operating Exposure
12
Subsidies
Government gives cost advantage
direct subsidy
grants
seed money
indirect subsidy
tax breaks/incentives
lowers marginal costs to domestic
firm
more competitive relative to foreign
competition
August 5, 2016
Operating Exposure
13
Regulatory intrusion
restrict products for non-compliance
labour laws
environmental laws
safety laws
create bureaucratic barriers
licensing
customs declarations
official delays
August 5, 2016
Operating Exposure
14
Monetary policy affects
monetary policy, high relative inflation
exchange rate depreciation
high volatility
higher costs of hedging
exchange rate policy, high relative inflation
frequent exchange market intervention
attempts to peg
frequent devaluations
capital controls
August 5, 2016
Operating Exposure
15
Fiscal policy affects
high deficits
financing costs increase country risk
higher interest rates
exchange rate depreciation
increased exchange rate volatility
adds to normally high debt load
higher taxes
higher political risk
August 5, 2016
Operating Exposure
16
Managing Operating exposure diversification
diversifying operations
multicountry sales
multicountry production
outsourcing
diversifying financing
reduce WACC
August 5, 2016
Operating Exposure
17
Managing operating exposure changing operating procedures
leads/lags
risk sharing
Re-invoicing centers
this is really transaction exposure
matching currency flows
loan in foreign currency
seek inputs invoiced in foreign currency
swaps
August 5, 2016
Operating Exposure
18
Operating exposure
real exchange rate changes
domestic firms with domestic market
international competition
real exchange rate changes affect
competitiveness
Canadian firms used to undervalued
dollars
exporters don’t have to compete hard
assume cd appreciates in real terms
Canadian exports become more expensive
foreign imports become less expensive
August 5, 2016
Operating Exposure
19