Prestasi Manajemen Keuangan Internasional BAB 9

Prestasi Manajemen Keuangan Internasional BAB 9

1. 1
Multinational Financial
Management
Alan Shapiro
7
th
Edition
J.Wiley & Sons
Power Points by
Joseph F. Greco, Ph.D.
California State University, Fullerton

2. 2
CHAPTER 10
MEASURING
ACCOUNTING
EXPOSURE

3. 3
CHAPTER OVERVIEW
I. ALTERNATIVE MEASURES OF
FOREIGN EXCHANGE EXPOSURE
II.ALTERNATIVE CURRENCY
TRANSLATION METHODS
III.STATEMENT OF FINANCIAL
ACCOUNTING STANDARDS NO.52

4. 4
CHAPTER OVERVIEW (con’t)
IV.TRANSACTION EXPOSURE
V.DESIGNING A HEDGING
STRATEGY
VI.MANAGING TRANSLATION EXPOSURE
VII.MANAGING TRANSACTION EXPOSURE

5. 5
PART I. ALTERNATIVE MEASURES OF
FOREIGN EXCHANGE EXPOSURE
I.ALTERNATIVE MEASURES OF FOREIGN
EXCHANGE EXPOSURE
A.Three Types of Exposure
1.Accounting Exposure:
when reporting and consolidating
financial statements requires conversion
from foreign to local currency.

6. 6
ALTERNATIVE MEASURES OF FOREIGN
EXCHANGE EXPOSURE
2.Transaction Exposure:
occurs from changes in the value
of foreign currency contracts as
a result of exchange rate
changes.

7. 7
ALTERNATIVE MEASURES OF FOREIGN
EXCHANGE EXPOSURE
3.Operating Exposure
arises because exchange rate
changes may alter the value of
future revenues and costs.

8. 8
ALTERNATIVE MEASURES OF FOREIGN
EXCHANGE EXPOSURE
Economic Exposure
= Transaction + Operating Exposures

9. 9
PART II. ALTERNATIVE CURRENCY
TRANSLATION METHODS
I.FOUR METHODS OF TRANSLATION
A.Current/Noncurrent Method
1. Current accounts use
current exchange rate
for conversion.
2. Income statement accounts
use average exchange
rate for the period.

10. 10
ALTERNATIVE CURRENCY
TRANSLATION METHODS
B.Monetary/Nonmonetary Method
1.Monetary accounts use
current rate
2.Pertains to
- cash
- accounts receivable
- accounts payable
- long term debt

11. 11
ALTERNATIVE CURRENCY
TRANSLATION METHODS
3.Nonmonetary accounts
- use historical rates
- Pertains to
inventory
fixed assets
long term investments
4.Income statement accounts
- use average exchange rate
for the period.

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ALTERNATIVE CURRENCY
TRANSLATION METHODS
C.Temporal Method
1.Similar to
monetary/nonmonetary
method.
2.Uses current method for
inventory.

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ALTERNATIVE CURRENCY
TRANSLATION METHODS
D. Current Rate Method
all statements use current
exchange rate for
conversions.

14. 14
PART III. STATEMENT OF INANCIAL
ACCOUNTING STANDARDS NO. 52
I.FASB NO. 52
A.Dissatisfaction with FASB No. 8
true profitability often disguised by
exchange rate volatility.
B.Balance sheet translation uses
current rate method.

15. 15
STATEMENT OF INANCIAL
ACCOUNTING STANDARDS NO. 52
C. Income statement uses
1. Weighted average rate
during period or
2. The rate in effect when
revenue and expenses
incurred.

16. 16
STATEMENT OF FINANCIAL
ACCOUNTING STANDARDS NO. 52
D.Translation Gains or Losses
1. Recorded in separate equity
account on balance sheet.
2. Known as cumulative translation
adjustment account.

17. 17
STATEMENT OF INANCIAL ACCOUNTING
STANDARDS NO. 52
E.New Distinction under FASB No. 52:
functional v. reporting currency
1. Functional currency
for foreign subsidiary = the
currency used in the
primary economic
environment in which it
operates.

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STATEMENT OF INANCIAL ACCOUNTING
STANDARDS NO. 52
2. Reporting currency
the currency the parent firm
uses to prepare its financial
statements.

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STATEMENT OF FINANCIAL
ACCOUNTING STANDARDS NO. 52
3. If foreign subsidiary’ operations are
direct extension of parent firm
e.g. Hong Kong assembly plant
which
sells all its products in the U.S.
market.

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PART IV. TRANSACTION EXPOSURE
I.WHEN DOES IT OCCUR?
A. From the time of agreement to time of
payment.
B.Arises from possibility of exchange
rate
gains and losses from the transaction.

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TRANSACTION EXPOSURE
II. MEASUREMENT
A. Currency by currency
B. Equals the difference between
1. The contractually-fixed invoice
amount in a specific currency
2. The final payment amount
denominated in current exchange
rate for the specific currency.

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PART V. DESIGNING A HEDGING
STRATEGY
III. DESIGNING A HEDGING STRATEGY
A.Strategies
a function of management’s
objectives
B.Hedging’s basic objective:
reduce/eliminate volatility of
earnings as a result of exchange
rate changes.

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DESIGNING A HEDGING
STRATEGY
C.Hedging exchange rate risk
1.Costs money
2.Should be evaluated as any other
purchase of insurance.
3.Taking advantage of tax
asymmetries lowers hedging
costs.

24. 24
DESIGNING A HEDGING
STRATEGY
D.Centralization v. Decentralization
1.Important aspects:
a.Degree of centralization
b.Responsibility for developing
c.Implementing the hedging
strategy.
2.Maximum benefits accrue from
centralizing policy-making,
formulation, and implementation.

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PART VI. MANAGING TRANSLATION
EXPOSURE
I.MANAGING TRANSLATION EXPOSURE
A.3 Available Methods
1.Adjusting fund flows
altering either the amounts or the
currencies of the planned cash
flows of the parent or its
subsidiaries to reduce the firm’s
local currency accounting
exposure.

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MANAGING TRANSLATION
EXPOSURE
2. Forward contracts
reducing a firm’s translation
exposure by creating an
offsetting asset
or liability in the foreign
currency.

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MANAGING TRANSLATION
EXPOSURE
3.Exposure netting
a. offsetting exposures in one
currency with exposures in the
same or another currency
b. gains and losses on the two
currency positions will offset each
other.

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MANAGING TRANSLATION
EXPOSURE
B.Basic hedging strategy for reducing
translation exposure:
1.increasing hard-currency(likely to
appreciate) assets
2.decreasing soft-currency(likely to
depreciate) assets
3.decreasing hard-currency liabilities

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MANAGING TRANSLATION
EXPOSURE
4.increasing soft-currency
liabilities
i.e. reduce the level of cash, tighten credit
terms to decrease accounts receivable,
increase LC borrowing, delay accounts payable,
and sell the weak currency forward.

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PART VII. MANAGING TRANSACTION
EXPOSURE
I.METHODS OF HEDGING
A.Forward market hedge
B.Money market hedge
C. Risk shifting
D. Pricing decision
E.Exposure netting
F.Currency risk sharing
G. Currency collars
H. Cross-hedging
I. Foreign currency options

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MANAGING TRANSACTION
EXPOSURE
Central idea: Hedging
Hedging a particular currency exposure
means establishing an offsetting
currency position
Whatever is lost or gained on the original
currency exposure is exactly offset by a
corresponding foreign exchange gain
or loss on the currency hedge

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MANAGING TRANSACTION
EXPOSURE
Managing transaction exposure:
A transaction exposure arises whenever
a company is committed to a foreign
currency-denominated transaction.
Protective measures include using:
forward contracts, price adjustment
clauses, currency options, and HC
invoicing.

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MANAGING TRANSACTION
EXPOSURE
A.FORWARD MARKET HEDGE
1. consists of offsetting
a. a receivable or payable in a foreign
currency
b. using a forward contract:
- to sell or buy that currency
- at a set delivery date
- which coincides with receipt of the
foreign currency.

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MANAGING TRANSACTION
EXPOSURE
2. True Cost of Hedging:
a. The opportunity cost depends upon
future spot rate at settlement
b. Shown as
f
1
- e
1
e
0
where f
1
= forward rate
e
0 = spot rate
e
1 = future spot rate

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MANAGING TRANSACTION
EXPOSURE
B.MONEY MARKET HEDGE
1.Definition:
simultaneous borrowing and
lending activities in
two different currencies to lock
in the dollar value of a future
foreign currency cash flow

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MANAGING TRANSACTION
EXPOSURE
C. RISK SHIFTING
1. home currency invoicing
2. zero sum game
3. common in global business
4. firm will invoice exports in strong
currency, import in weak currency
5. Drawback:
it is not possible with informed
customers or suppliers.

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MANAGING TRANSACTION
EXPOSURE
D. PRICING DECISIONS
1. general roles: on credit sales connect
foreign price to home price using
forward rate, but not spot rate.
2. if the dollar price is high/low enough
the exporter/importer should follow
through with the sale.

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MANAGING TRANSACTION
EXPOSURE
E.EXPOSURE NETTING
1. Protection can be gained by selecting
currencies that minimize exposure
2. Netting:
MNC chooses currencies that are not
perfectly positively correlated.
3. Exposure in one currency can be
offset by the exposure in another.

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MANAGING TRANSACTION
EXPOSURE
F. CURRENCY RISK SHARING
1. Developing a customized hedge
contract
2. The contract typically takes the form
of a Price Adjustment Clause, whereby a
base price is adjusted to reflect certain
exchange rate changes.

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MANAGING TRANSACTION
EXPOSURE
F. CURRENCY RISK SHARING (con’t)
3. Parties would share the
currency risk beyond a
neutral zone of exchange
rate changes.
4. The neutral zone represents
the currency range in which
risk is not shared.

41. 41
MANAGING TRANSACTION
EXPOSURE
G. CURRENCY COLLARS
1. Contract bought to protect
against currency moves outside
the neutral zone.
2. Firm would convert its foreign
currency denominated receivable
at the zone forward rate.

42. 42
MANAGING TRANSACTION
EXPOSURE
H.CROSS-HEDGING
1. Often forward contracts not available
in a certain currency.
2. Solution: a cross-hedge
- a forward contract in a related
currency.
3. Correlation between 2 currencies is
critical to success of this hedge.

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MANAGING TRANSACTION
EXPOSURE
I. Foreign Currency Options
When transaction is uncertain, currency
options are a good hedging tool in
situations in which the quantity of
foreign exchange to be received or paid
out is uncertain.

44. 44
MANAGING TRANSACTION
EXPOSURE
I. Foreign currency options
1. A call option
is valuable when a firm has
offered to buy a foreign asset at
a fixed foreign currency price
but is uncertain whether its
bid will be accepted.

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MANAGING TRANSACTION
EXPOSURE
2. The firm can lock in a maximum dollar
price for its tender offer, while
limiting its downside risk to the
call premium in the event its bid is
rejected.

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MANAGING TRANSACTION
EXPOSURE
3. A put option
allows the company to insure its
profit margin against adverse
movements in the foreign currency
while guaranteeing fixed prices to
foreign customer.