ADVANCED FINANCE MANAGEMENT

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THI XINH LE SL1909035
KIM NGAN LE SL1909025
THI NGOC LAN LE SL1909034
Application of Prisoner’s
Dilemma Game in Game
Theory Analysis in
equitization in Viet Nam
Course: Advanced
Finance
Management
Teacher: Li Jie

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THI XINH LE SL1909035
Proactive Management
of Operating Exposure
Course: Advanced
Finance
Management
Teacher: Li Jie

3. Content

4. Contents
What is the
Operating
Exposure?
Introduce about Proactive
Management for Operating
Exposure?
The FOUR most
commonly
employed proactive

5. Operating Exposure
• Operating exposure, also called economic exposure,
competitive exposure, or strategic exposure, measures
any change in the present value of a firm resulting from
changes in future operating cash flows caused by any
unexpected change in exchange rates
• Therefore, operating exposure analysis accesses the impact
of changing exchange rates on a firm’s operations over the
following years and on its competitive position with other
firms
• The goal of operating exposure analysis is to identify
possible strategic actions or operating techniques that the firm
might adopt to enhance its market value for unexpected
exchange rate changes

6. Proactive management for
Operating Exposure
• Operating exposure (as well as transaction exposure)
can be partially managed by adopting operating or
financing policies that offset anticipated foreign exchange
exposures.
Proactive management for Operating Exposure
• The four most commonly employed proactive policies are:
1. Matching currency cash flows
2. Risk-sharing agreements
3. Back-to-back loans
4. Currency swaps
5. Leads and lags
6. Reinvoicing centers

7. 1. Matching currency cash flows
– First and the most common way is the use of the financial
hedge to offset an anticipated continuous operating exposure
by acquiring part of the firm’s debt-capital in that currency.
– This form of hedging is effective in eliminating currency risk
when the exposed cash flow is relatively constant and
predictable over time
– Another alternative would be for the U.S. firm to seek out
potential suppliers of raw materials or components in Canada
as a substitute for U.S. or other foreign firms
– If the receivable and payable cash flows were roughly the
same in magnitude and timing, this strategy forms a natural
hedge
– A third alternative for the company is to engage in currency
switching, in which the U.S. firm would pay foreign suppliers
(e.g., Mexican) with Canadian dollars

8. 1. Matching currency cash flows
Debt Financing as a Financial Hedge

9. 2. Risk-sharing agreements
• This is a contractual arrangement in which the buyer and seller
agree to “share” or split currency movement impacts on
payments between them.
• This agreement smoothes the impact of volatile and
unpredictable exchange rate movements on both parties
• Ex: Ford and Mazda
Ford imports automotive parts form Mazda, so swings in
exchange rates can benefit one party at the expense of the
other
One risk-sharing solution is that if the EX rate on the payment
date is between ￥115/$ and ￥125/$, Ford pays at that EX
rate, but if the EX rate falls outside this range on the payment
date, Ford and Mazda will share the difference equally
That is, for ￥110/$ (￥130/$), the effective exchange rate for
Ford will be ￥112.5/$ (￥127.5/$)

10. 3. Back-to-back loans
• A back-to-back loan, also referred to as a parallel loan
or credit swap, two firms in different countries arrange to
borrow each other’s currency for a specific period of time
 Two loans for equal values at current spot.
 At maturity return borrowed currency.
 Conducted outside forex markets, but use spot quotes as
reference.
 Creates covered hedge
Each company borrows same currency as it repays.
No need for collateral.
 Difficult to find counterparty.
 Counterparty risk.

11. 3. Back-to-back loans
Using a Back-to-Back Loan for Currency Hedging

12. 4.Currency Swaps (or Cross Currency
Swap, CCS
• In a currency swap, a dealer and a firm agree to
exchange an equivalent amount of two different
currencies for a specified period of time
– Resemble back-to-back loans except that it does not
appear on a firm’s balance sheet(it only entered in a
firm’s footnotes )
– Can be negotiated for a wide range of maturities
• A typical currency swap requires two firms to borrow
funds in the markets and currencies in which they are
best known or get the best rates

13. 4.Currency Swaps
Using a Cross-Currency Swap to Hedge Currency Exposure

14. 5. Leads and Lags:
Re-timing the Transfer of Funds
• Accelerating or decelerating the timing of payments
that must be made or received in foreign currencies
– To lead is to pay early
– To lag is to pay late
• Leading and lagging can be done between related
firms (intracompany) or with independent firms
(intercompany)

15. 6. Reinvoicing Centers
• A reinvoicing center is a separate corporate subsidiary that
serves as a type of “middle-man” between the parent or
related unit in one location and all foreign subsidiaries in a
geographic region
– Handle paperwork but has no inventory
– Specialized expertise in choosing hedging technique
– Obtaining more competitive foreign exchange quotations
from banks
– Managing intro-subsidiary cash flows, need only hedge
residual exchange exposure.
– The main disadvantage is one of cost relative to benefits
received as an additional corporate unit must be created
and a separate set of books must be kept.

16. 6. Reinvoicing Centers
Use of a Reinvoicing Center

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