Foreign Exchange Rate Sensitivity and Stock Price

This case shows us that apart from transaction, translation and economic exposure to currency risk, firms also have the very real strategic impact on their competitive position from competitive exposure. Apart from GM’s exposure to the yen which is reflected in their financial statements, their competitive position vis-à-vis Japanese manufacturers is affected by a potentially declining yen. This is because a declining yen reduces the Japanese manufacturers’ $ cost, enabling them to pass on some of the benefit to US customers and thus taking some of GM’s market share. This will impact GM’s top and bottom line. However, GM has a difficult decision regarding managing this risk.

The exchange rates risk that is associated with economic, transaction, and translation exposure in Indian market. From the analysis, anticipate the fluctuations that seem to occur in the next 24 months

2.There are three different types of foreign exchange risk: transaction exposure, economic exposure, and translation exposure. Transaction exposure refers to the extent to which transactions are liable to be affected by the exchange rate at a given moment. Because of the constant fluctuations of the exchange rate, the profits garnered from a given transaction can be greatly affected. Economic exposure refers to the tendency that a change in exchange rate can have on a party's cash supply and earnings. This has similar consequences to those of transaction exposure, except that it is not directly related to a specific transaction. Translation exposure relates to the impact that changes in exchange rates can have on the financial statements of a country; they differ from the other types of foreign exchange risk in that they have less relation to transactions.

Before we look at these forces, we should sketch out how exchange rate movements affect a nation 's trading relationships with other nations. A higher currency makes a country 's exports more expensive and imports cheaper in foreign markets; a lower currency makes a country 's exports cheaper and its imports more expensive in foreign markets. A higher exchange rate can be expected to lower the country 's balance of trade, while a lower exchange rate would increase it.

General Motors Corporation, the world’s largest automaker, has an extensive global outreach, which places the firm in competition with automakers worldwide, and subjects itself to significant exchange rate exposure. In particular, despite most of its revenues and production being derived from North America, depreciating yen rates pose problems for the firm indirectly through economic exposure. While GM possesses ‘passive’ hedging strategies for balance sheet and income statement exposures, management has not yet quantified or recognized solutions to possible losses from the indirect competitive exposure it now shared with Japanese automakers in the U.S import

To study this subject, the author used a questionnaire of MNCs, choosing the largest 600 questionnaires from the UK, USA, Australia, Hong Kong, Japan, Singapore and South Korea. A total of 179 usable responses were received and this was the basis of the paper. The questionnaire covered a number of different subjects, including the importance of foreign exchange rate risk management, the objectives of managing foreign exchange rate risk, the degree of emphasis on transaction risk, the degree of emphasis on translation risk, the degree of emphasis on economic risk, and whether the respondent manages translation risk internally. The questionnaire also sought to understand some of the techniques that firms in the different regions used, for example pricing strategy, operating hedges, and planning. Where economic risk was not managed, the author sought to find out why the company had chosen not to manage this type of risk.

Fluctuations in foreign exchange rates may have an adverse impact on profitability and cause cash flow to be somewhat unpredictable for budget planning purposes.

Due to the geographic diversity of countries where BHP Billiton has extended to, the variation of foreign exchange rate obviously plays a crucial role on its financial performance. According to the annual report of BHP Billiton (2015), US dollar is not only the functional currency utilized in majority of sales and transaction, but also the presentation

Given the nature of its business, Jaguar is faced with three types of exchange rate exposure (1) Transaction, (2) Translation and (3) Economic . Transaction exposures arise whenever the firm commits (or is contractually obligated) to make or receive a payment at a future date denominated in a foreign currency. Translation exposures arise from accounting based changes in consolidated financial statements caused by a change in exchange rates. In this case we primarily focus on the Economic exposure -also known as Operating exposure or Competitive exposure- of Jaguar.

Journal written by Robert G.Rulland from Northeastern University and Timothy S.Dauprik from Univesity of South Carolina discussed about the foreign currency translation and behaviour of exchange rate. Consequently, the first controversy is which translation method provides the most meaningful translation gains and losses, for example which method provides the most reasonable measure of the foreign entity's exposure to movements in exchange rates. The second controversy is whether translation gains and losses should be reported in the income statement or whether they should be deferred and shown in the stockholders' equity section of the balance sheet. Two major controversies exist in the translation of foreign currency financial statements is first which translation method should be used, and the second is how should the resulting translation gains and losses be reported. When items translated at current exchange rates, translation gains and losses result. Translation methods vary as, to which balance sheet items translated at current and which at historical exchange rates. This paper proposes two criteria for settling these questions which are based upon the actual pattern of exchange rates existing between the U.S. dollar and other currencies .It is argued that application of these criteria would result in a more objective and economically meaningful translation process than exists under current rules.

Exhibit 7 from the case study describes the currency development in medium term of the GBP and EURO against the dollar. We can observe that the currencies are exposed to high volatility, which means the company may register greater risk

Exchange rate has given both positive and negative impact towards foreign direct investment (FDI). If foreign direct investment (FDI) in that country is export substituting, the increase in exchange rate volatility between headquarters and the country that allow foreign direct investment (FDI) induce a multinational to serve the host country via a local production facility rather than exports, thereby insulating against currency risk. According to Osinubi (2009), direct investment in a country with a high degree of exchange rate volatility will have more risky of profits which indicates negative impact of exchange rate towards foreign direct investment

Aspen has become a public company with more risk adverse investors who want to invest in the core business of the firm and not assume any foreign exchange risk. Foreign exchange risk is a core risk to Aspen’s business because they have many customers outside of the United States. We believe that transferring this risk to the customers would limit Aspen’s growth on the foreign markets: Aspen should keep its current marketing strategy, which includes credit installment payments and payments in local currencies for Japan, the UK and Germany. The current risk management program hurts the company because it doesnot consider Aspen’s expenses abroad that balance sales exposures to currency fluctuations. We then recommend that

It is important for investors to consider and understand the changes of influence foreign exchange market have on the stocks. So the investors need to know the currency exposure of the company portfolio.

Keegan and Green (2009) “wrote that currency exchange rates are extremely unpredictable that several enterprises pursue international sourcing strategies as a way of reducing exchange-related risk” (p.285). Currency rates can have an impact on revenues for a U.S. company expanding operations in foreign countries, depending on exchange rates. For example, the U.S. dollar is only worth seventy-four cents in Italy.