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1. Chapter 9 Operating Exposure

5. Operating & Financing Cash Flows Subsidiary Parent Operational Cash Flows Payment for goods & services Rent and lease payments Royalties and license fees Management fees & distributed overhead Financial Cash Flows Dividend paid to parent Parent invested equity capital Interest on intrafirm lending Intrafirm principal payments

8. Trident’s Operating Exposure Trident Europe (Hamburg, Germany) Euro Competitive Environment Trident Corporation (Los Angeles, USA) US$ Reporting Environment US$/ € Trident’s Suppliers Trident’s Customers An unexpected depreciation in the value of the euro alters both the competitiveness of the subsidiary and the financial results which are consolidated with the parent company. Will costs change? How will the sales, costs, and profits of the German subsidiary change? Will the altered profits of the German subsidiary, in euro, translate into more or less in US dollars? Will prices & sales volume change?

10. Trident’s Operating Exposure

17. Matching Currency Cash Flows U.S. Corporation Canadian Corporation (buyer of goods) Exports goods to Canada Payment for goods in Canadian dollars Exposure : The sale of goods to Canada creates a foreign currency exposure from the inflow of Canadian dollars Principal and interest payments on debt in Canadian dollars Canadian Bank (loans funds) US Corp borrows Canadian dollar debt from Canadian Bank Hedge : The Canadian dollar debt payments act as a financial hedge by requiring debt service, an outflow of Canadian dollars

21. Back-to-Back Loans The back-to-back loan provides a method for parent-subsidiary cross border financing without incurring direct currency exposure. Indirect Financing British parent firm 1. British firm wishes to invest funds in its Dutch subsidiary Dutch firm’s British subsidiary 3. British firm loans British pounds directly to the Dutch firm’s British subsidiary Direct loan in pounds Dutch parent firm 2. British firm identifies a Dutch firm wishing to invest funds in its British subsidiary British firm’s Dutch subsidiary 4. British firm’s Dutch subsidiary loans euros to the Dutch parent Direct loan in euros

24. Currency Swaps Wishes to enter into a swap to “ pay dollars” and “receive yen” Japanese Corporation Assets Liabilities & Equity Debt in yen Sales to US Swap Dealer Receive dollars Pay dollars Pay yen Receive yen Wishes to enter into a swap to “ pay yen” and “receive dollars” United States Corporation Debt in US$ Assets Liabilities & Equity Sales to Japan Inflow of yen Inflow of US$

29. Use of a Reinvoicing Center 3. The reinvoicing center takes legal title to the goods. 1. Trident USA ships goods directly to the Brazilian subsidiary. 2. The invoice by Trident USA, which is denominated in U.S. dollars, is passed to the reinvoicing center. 4. The reinvoicing center invoices Trident Brazil in Brazilian real, repositioning the currency exposure from both operating units to the reinvoicing center. Trident USA (Manufactures unfinished switches) Trident Brazil (Finishes for local sales) Physical goods Goods are resold by reinvoicing center to Brazilian sales subsidiary in Brazilian real (R$) Reinvoicing Center Goods are sold by Trident USA to reinvoicing center in U.S. dollars

35. Mini-Case: Impact of Treasury Profits on EBIT Margins Source: CreditSuisse/First Boston, December 13, 2003, p. 47, p. 70. Values for 2003/04 are estimates.

37. Exhibit 9.1 Financial and Operating Cash Flows Between Parent and Subsidiary

38. Exhibit 9.2 Trident Corporation and Its European Subsidiary: Operating Exposure of the Parent and Its Subsidiary

39. Exhibit 9.3 Trident Europe

40. Exhibit 9.4 Matching: Debt Financing as a Financial Hedge

41. Exhibit 9.5 Using a Back-to-Back Loan for Currency Hedging

42. Exhibit 9.6 Using a Cross- Currency Swap to Hedge Currency Exposure

43. Exhibit 9.7 Use of a Reinvoicing Center

44. Exhibit 1 Toyota Motor’s European Currency Operating Structure

45. Exhibit 2 Daily Exchange Rates: Japanese Yen per Euro

46. Exhibit 3 Daily Exchange Rates: British Pounds per Euro

47. Exhibit 1 United Kingdom and NAFTA Sales and Production of Selected European Automakers as a Percent of Global Results, 2002

48. Exhibit 2 Impact of Porsche’s Treasury Profits on EBIT Margins