Determinants of Operating Exposure in Global Institutions
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Determinants of Operating Exposure
Global institutions experience challenges with the varying foreign exchange even as they try to counter the effect through hedging strategies. Change in the value of one currency can adversely affect a company and destabilize its competitive advantage against other competitors within the same economy. Head of firms, therefore, have to understand the effects of the exchange of volatile currency rates on the operating cash flows. The situation where the random exchange affects operating cash flow of a firm due to the changes, changing the competitive advantage of such company in markets, then the situation is described to as operating exposure.
The first determinant of operating exposure is the market and the source of inputs, where a company trade goods and obtain materials in the event of currency exchange is a factor (Eun & Resnick, 2015). The capacity of a firm to moderate the effects of volatility of currency exchange through measures it deems fit such as adjusting markets is another determinant. Companies need to think of ways of guarding their competitive advantage in the event of fluctuations in the foreign exchange rates to ensure their stability and continued operation in the markets.
Because of operating exposure, the implication of purchasing power parity for companies will be the unequal competitiveness of the firms. If the processes are mitigated and the company had measures placed to counter events of foreign exchange volatility, then its competitiveness will not be affected (Eun & Resnick, 2015). For example, if a local company exports to a foreign country, which uses the dollar at a time the dollar, is stronger than the local currency, then the products will trade at a lower price. When the local currency is stronger than the dollar, it means that the product will be more expensive in the foreign market reducing sales of the company. Exchanging local currencies to purchase external input in the event the local currency is stronger, it means that more input will be acquired, and producing the product cheaply.