Operating Exposure Arises When a Essay

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An example in the automobile industry was when BMW decided to build a plant in the U.S. This was an unusual move for a European automaker at the time, but it provided an operating hedge for U.S.-denominated revenues. The long-run trend in the mark was an influence on this decision, as it was becoming a source of long-run competitive disadvantage (Kim & McElreath, 2001). Another example would be Wal-Mart. The company first made the decision to source from China because the yuan was being deliberately undervalued. However, this tactic exposes the company to the yuan, so Wal-Mart has built a large chain in China. This provides an operating hedge that allows the company to pay for some of the Chinese goods it buys with yuan earned from its Chinese operations.

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This same strategy has been utilized in Canada, Mexico and Europe by the company as well, and other international retailers such as Carrefour have also entered the Chinese market for similar reasons (China Beverage News, 2010).

Financiers alone cannot adequately manage operating exposure. Managing this form of foreign exchange risk must include the entire company. Operating decisions, with regards to specific geographic locations, can help to manage this risk. Hedging programs can be used, but are less than ideal because operating exposure is difficult to measure. The financier therefore needs to work with senior management to ensure that when decisions are made, that those decisions reflect the relevant operating risks in addition to the other considerations.

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