Managerial Exposure to Exchange Rate Risk The managers of many U.S.-based MNCs have heard arguments that an MNC’s exposure to currency movements will have unfavorable effects on its cash flows and earnings in some periods, and favorable effects on its cash flows and earnings in other periods, and that these effects will offset in the long run. Yet managers' compensation (including bonuses) for the current quarter or year is often based on the reported earnings. Thus, because the earnings are influenced by exchange rate movements, managers' own compensation is influenced by exchange rate movements. Write a short essay on how MNCs could revise their bonus structure so that bonuses are not influenced by exchange rate movements. Alternatively, offer arguments to support leaving the bonus structure as it is.

FindFind

International Financial Management

14th Edition
Madura
Publisher: Cengage
ISBN: 9780357130698
FindFind

International Financial Management

14th Edition
Madura
Publisher: Cengage
ISBN: 9780357130698

Solutions

Chapter 10, Problem 1CT
Textbook Problem

Managerial Exposure to Exchange Rate Risk The managers of many U.S.-based MNCs have heard arguments that an MNC’s exposure to currency movements will have unfavorable effects on its cash flows and earnings in some periods, and favorable effects on its cash flows and earnings in other periods, and that these effects will offset in the long run. Yet managers' compensation (including bonuses) for the current quarter or year is often based on the reported earnings. Thus, because the earnings are influenced by exchange rate movements, managers' own compensation is influenced by exchange rate movements. Write a short essay on how MNCs could revise their bonus structure so that bonuses are not influenced by exchange rate movements. Alternatively, offer arguments to support leaving the bonus structure as it is.

This textbook solution is under construction.

Expert Solution

Want to see the full answer?

Check out a sample textbook solution.

Want to see this answer and more?

Experts are waiting 24/7 to provide step-by-step solutions in as fast as 30 minutes!*

*Response times vary by subject and question complexity. Median response time is 34 minutes and may be longer for new subjects.