Term
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Definition
Focuses on the impact of currency fluctuations on a firms value.
MUST incorporate all expectations about the risk into all basic decisions of the firm |
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Term
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Definition
| Occurs the moment the firm starts to invest in a market subject to foreign |
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Term
| Implications of Real Rate Changes (Nominal rate adjusted for price changes) |
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Definition
1) If nominal rates change with an equal price change, no alteration to cash flows
2) If real rates change, it causes relative price changes and changes in purchasing power |
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Term
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Definition
Decline in the real value of a home currency: Makes EXPORTS and import competing goods more competitive
Appreciation in the real value of a home currency: Makes IMPORTS and export competing goods more competitive. |
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Term
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Definition
| Depends on elasticity of goods and services provided. More elastic = greater price fluctuations. |
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Term
| Operating Exposure Management |
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Definition
| Requires long term operating adjustments and the involvement of all departments |
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Term
| Planning for exchange rate changes |
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Definition
Develop contingency plans with plausible scenarios before the impact of a currency change makes itself felt.
Shorten product life cycles. |
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Term
| Financial Management of Exchange rate risk |
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Definition
| Structure the firms liabilities in such a way that the reduction in asset earnings is matched by a corresponding decrease in servicing liabilities. |
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Term
| Financial Management of Exchange rate risk (Cont) |
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Definition
Provide Forecasts of inflation and exchange rate changes to local markets.
Identify and focus on exposures.
Help design and evaluate criteria so that operating managers are neither rewarded or penalized by unexpected exchange rate risk. |
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Term
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Definition
| Exhibit 11.5, 11.4 in the notes. |
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