Operational exposure
What?
Firm's future day to day operating revenues & expenses will be affected by FX movements
FX fluctuations can alter company's future revenues & expenses by affecting price & cost competitiveness
Eg: foreign subsidiary operating expenses paid in foreign currency but products imported
Decline in real value of domestic currency make exports more competitive
Appreciating currency: imports more competitive
Price elasticity
% change in quantity demanded due to a % change in price
greater price elasticity, less flexibility to respond to exchange rate changes
As home currency appreciated, pricing flexibility is the key
Product differentiation
How different & internationally diversified the local firm's products are to competitors is important
Greater the difference, greater the price elasticity protection
Eg: high status brands like Mercedes benz
Vs. commodity products like textile and steel
Shift & substitution
Greater flexibility to substitute between home & foreign country inputs of production, lower exchange rate risk
Marketing management (right markets, pricing & product strategy)
Initial export market choice depends on firm's strength
If home country's FX appreciated & exporters lose competitive advantage, they can either hold foreign price constant & loose market share/ retain market by lowering foreign price & suffer thinner profit
Product's price elasticity of demand will help the FX price cutting decision
Product strategy: respond to ex. rate changes by altering product strategies such as introducing new products/ changing existing products
Period after home country's FX devaluation is ideal to introduce new product & increase product lines
Period after home country's FX appreciation is ideal for product deletions
Product management
Sourcing & production of major components is key aspect of MNC operations as investment in r&d
Firms should be prepared to reallocate business as condition change
One can increase production in a country with weaker currencies and decrease with stronger currencies
Start production within major markets to avoid FX exposure or lower costs
Financial management
Structure liabilities so a reduction in FX asset earnings is matched by corresponding decrease in FX servicing liabilities
Firm with large export market should hold a portion of its liabilities in that country
Eg: volkswagen suffered when the Euro appreciated against USD. Could have minimised loss by borrowing in USD from US banks
Other management
Avon products sold its product but did not suffer during financial crisis
Bcs Avon purchased its raw materials from same countries
Borrowed from local currency from local banks
Provide local manager with forecast of inflation & exchange rate changes
Identify & focus on competitive exposure
Design evaluation criteria so that operating managers neither rewarded nor penalized for unexpected ex. rate changes