Question

Discuss the ways in which international companies can manage their economic exposure due to unexpected exchange rate fluctuations?

Compare and contrast multi-domestic and global strategies. In what kind of industries will each strategy make more sense? Explain with an example.

Answer 1

Management of economic exposure due to unexpected exchange rate fluctuations :-

1) Economic exposure refer to the impact exchange rate fluctuations can have on firms cash flow .

2 ) The impact of the fluctuations is complex because of the nature of variability in real growth , inflation , government actions .

3) The company can mitigate this risk by adjusting it's financing and operating strategies.

4) The MNC can determine its exposure by assessing the sensitivity of its cash inflows and outflows to various possible exchange rate scenarios.

5) Restructuring involving shifting the sources of costs and revenue to other locations in order to match cash inflows and outflows in foreign currencies can de used to reduce economic exposure.

Multi domestic strategies :-

1) It involves diversifying production centres

2) Increasing the markets of products

3) Sourcing flexibility if the exchange rate moves makes input very expensive for one particular region .

4) Sourcing financing to minimise company's dependency on any particular currency .

Global strategies :-

1) It involves matching currency flows

2) Taking up forward and future contracts

3) Dynamic hedging strategies and currency swaps strategies between companies located in different countries .

4) Currency risk sharing agreement between two countries or parties located in different countries who are involved in sale and purchase with each other .

5) Back to Back loans also known as credit swap arrangements