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International Finance of Chemex

7. Chemex, a U.S. maker of specialty chemicals, exports 40 percent of its $600 million in annual sales: 5 percent goes to Canada and 7 percent each to Japan, Britain, Germany, France, and Italy. It incurs all its costs in U.S. dollars, while most of its export sales are priced in the local currency.

a. How is Chemex affected by exchange rate changes?

b. Distinguish between Chemex's transaction exposure and its operating exposure.

c. How can Chemex protect itself against transaction exposure?

d. What financial, marketing, and production techniques can Chemex use to protect itself against operating exposure?

e. Can Chemex eliminate its operating exposure by hedging its position every time it makes a foreign sale or by pricing all foreign sales in dollars? Why or why not?

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a. How is Chemex affected by exchange rate changes?

ANSWER. As an exporter, Chemex is helped by dollar depreciation and hurt by dollar appreciation. If the dollar appreciates, the firm's costs will appreciate in terms of the foreign currencies in which it sells. If it raises its foreign currency prices, it risks losing sales, and with them profits and worse, permanent market standing. If it does not raise prices in the foreign currencies, its dollar profit margins shrink, and with them its profits. Yet, Chemex may not be affected as much by currency changes as a commodity chemical maker would be since its products are differentiated (it makes specialty chemicals). To the extent that its major competitors are other American companies, who share a common cost structure, its exchange risk will be lower still.

b. Distinguish between Chemex's transaction exposure and its operating exposure.

ANSWER. Chemex's transaction exposure stems from the fact that most of its export sales are priced in the local currency of the countries to which it ...

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