Index

Accounting for FX translation, 57–59

Accumulated other comprehensive income (AOCI), 57

Adventure & Recreation Technologies, Inc. (ART), 123–134

Altria Group, Inc., 78, 114

Amherst Controls Co., 76–77, 78–80

American Bio Products Company, 32

AOCI. See Accumulated other comprehensive income

Applied Materials’ Yen Debt, 73

ART. See Adventure and Recreation Technologies, Inc.

At-market swap, 98

Back-to-back loans, 100–102

Barcelona Supply AG, 58, 59

Browning Imports Co., 81

Business value, 39–40, 42–43

Case

Adventure & Recreation Technologies, Inc., 123–134

Cash flow hedge, 77

Chestnut Co., 114–115

Competitive FX exposure, 25–32

Constant growth model, 39

Cross-currency swap, 98

CTA. See Cumulative translation adjustment

Cumulative translation adjustment (CTA), 57, 75

Currency swaps

and FX equity exposure, 109–112

back-to-back loans, 100–102

fixed-for-fixed currency swaps, 97–99

managing FX exposure with, 112–115

mark-to-market (MTM) value, 107–109

off-market swap, 115–116

parallel loans, 100–102

swap components, difference check settlement of, 104–106

swap-driven financing, 102–104

World Bank-IBM swap, 95–97

Delta Ltd., 31

Disney’s Synthetic Yen Financing, 103–104

Dow Chemical, FX pass-through, 12–13

Enterprise value, 42–43

Equity market cap, 42

Financial hedging

Adventure & Recreation Technologies, Inc., 127–129

of FX exposure, 69

issues in, 84–85

Financial leverage, 67

FX hedging and, 82–84

Fixed-for-fixed currency swaps, 97–99

Fixed-for-floating currency swap, 98

Foreign currency (C), 1

versus home currency, 11

Foreign currency debt, 67–69

and FX equity exposure, 69–74

and hedge accounting, 74–80

issues with, 85–88

FX hedging, 82–84

financial leverage and, 82–84

McDonalds, 68

Foreign exchange operating exposure

Adventure & Recreation Technologies, Inc., 125–126

Airbus, 3

analyses, 4–7

as an elasticity, 1–2

and competition, 25–32

FX pass-through, 11–13

high/low, 3

operational hedging, 7–10

regression estimates of, 32

Functional currency, 57

FX business exposure, 40–42

hedging negative, 80–82

of multinational, 43–44

FX conversion rate, 104

FX economic exposure

operating leverage, 22–23

price elasticity of demand, 23–25

rate and sales volume, 19–22

FX equity exposure, 44–49

Adventure & Recreation Technologies, Inc., 126–127

currency swaps and, 109–112

foreign currency debt and, 69–74

regression estimates of, 50–52

FX exposure

business exposure, 40–42, 80–82

business value, 39–40, 42–43

enterprise value, 42–43

equity exposure, 44–49

hedging FX exposure, 61–62

multinational, business exposure of, 43–44

regression estimates, of FX equity exposure, 50–52

translation exposure, 59–60

FX hedging

financial leverage and, 82–84

FX operating exposure. See Foreign exchange operating exposure

FX pass-through, 11–13

FX translation exposure, 59–60

accounting for, 57–59

hedging, 61–62

FX translation gain, 57

FX translation loss, 57

Granger Controls Co., 83

Hedge accounting

foreign currency debt and, 74–80

Hedging FX exposure, 61–62

negative, 80–82

Home bias, 132

Home currency (HC), 1

versus foreign currency, 11

Hypothetical loans, 100

Interest rate swap, 99

Intex Co., 70

Intrinsic business value, 39, 40

Major currency index (MCI), 50, 51

Maquiladora, 60

Mark-to-market value, 107–109

MCI. See Major currency index

Merck, 85

Modified closing rate method, 57

Moran Manufacturing Company, 42

MTM value. See Mark-to-market value

Naked currency swap position, 109

Net debt, 42, 43, 45

Net financial leverage ratio, 45

Net investment, 58

Net investment hedge, 75

Northern Mining Co., 72

Notional principal, 97

Off-market swap, 115–116

Operating leverage, 22–23

Operational hedging, 7–10

Airbus, 10

United Technologies Corporation (UTC), 9–10

Parallel loans, 100–102

Pro forma cash flow statements, 4

Price elasticity of demand, 23–25

Regression estimates, 32

Straight bond, 97

Swap interest component, 105

Swap principal component, 105

Swap-driven financing, 102–104

Temporal method, 60

Translation exposure, 59–60

Tri-State Technologies Co., 73

UIRP. See Uncovered interest rate parity

Uncovered interest rate parity (UIRP), 69

United Technologies Corporation (UTC), 9–10

UTC. See United Technologies Corporation

Vulcan Materials, 32, 81–82

World Bank-IBM swap, 95–97

Worldwide tax system, 87