Reference no: EM13208846

Discuss the following topic: "Is restructuring of operations a solution to operating exposure?" Operating exposure measures any changes in the present value of a firm resulting from changes in future operating cash flows caused by any unexpected change in exchange rates. From a broader perspective, operating exposure is not just the sensitivity of firm's future cash flows to unexpected change in foreign exchange rates, but also its sensitivity to other key macroeconomic variables, such as interest rates and inflation rates. However, these variables are often in disequilibrium with one another. Therefore, unexpected changes in interest rates and inflation rates could also have a simultaneous but differential impact on future cash flows.

Instructions:

1- To read the point and counter-point of this argument and express your own opinion on this topic :

Point: Yes 

Multinational firms may restructure their operations to reduce their operating exposure. The restructuring involves shifting the sources of costs or revenue to other locations in order to match cash inflows and outflows in foreign currencies. The way a firm restructure its operations to reduce operating exposure to exchange rate risk depends on the form of exposure. If future expenses are more sensitive than future revenue to the possible values of a foreign currency, then the firm can reduce its operating exposure by increasing the sensitivity of revenue and reducing the sensitivity of expenses to exchange rate movements. Firms that have a greater level of exchange rate-sensitive revenue than expense, however, would reduce their operating exposure by decreasing the level of exchange rate-sensitive revenue or by increasing the level of exchange rate-sensitive expenses.

Counter-point: No 

Some revenue or expenses may be more sensitive to exchange rates than others. Therefore, simply matching the level of exchange rate-sensitive revenue to the level of exchange rate-sensitive expenses may not completely insulate a firm from the exchange rate risk. Furthermore, restructuring operations to reduce operating exposure is a more complex task than hedging any single foreign currency transactions, which is why managing operating exposure is normally perceived to be more difficult than managing transaction exposure.