Corporate Decision-Making with Macroeconomic

Very few firms make any attempt in their annual reports to inform market participants about the impact of macroeconomic developments on performance. However, the market is not oblivious to this fact, so the firm, as well as financial analysts, need to pay attention. Corporate Decision-Makingwith Macroeconomic Uncertainty: Performance and Risk Management develops and presents in an easily comprehensible way the essential elements of a corporate strategy for managing uncertainty in the macroeconomic environment. This Macroeconomic Uncertainty Strategy, or MUST, enhances firm value byallowing management and external stakeholders to distinguish between changes in the intrinsic competitiveness of the firm and changes in performance caused by macroeconomic fluctuations. These fluctuations, manifested as changes in exchange rates, interest rates, and inflation rates, are beyondmanagement's control, but they have a substantial impact on performance.The book includes methods to identify the impact of these fluctuations, to develop strategies for macroeconomic risk management, to develop reports to external stakeholders, to evaluate the relative performance of subsidiariesand business units in multinational companies, and to evaluate performance as part of the due diligence process in an M and A context. The authors' use of value-based management, various performance measurements, and the concept of real options makes the book rich and compelling.

Macroeconomic Uncertainty in a Corporate Perspective	p. 3
Introduction	p. 3
The macroeconomic environment of the firm	p. 6
What level of concern?	p. 11
Macroeconomic Uncertainty Strategy (MUST)	p. 12
The contents of this book	p. 13
Concepts of Macroeconomic Risk Management	p. 16
Introduction	p. 16
Corporate risk: A brief review of the concept	p. 17
Corporate risk: Who cares?	p. 20
Macroeconomic risk	p. 25
What could be gained from a risk management program?	p. 28
Risk management and the creation of options	p. 30
Concluding remarks: The case for risk management	p. 31
Traditional Approaches to Measuring Macroeconomic Exposure	p. 34
Introduction	p. 34
From transaction exposure to economic exposure	p. 35
Translation exposure	p. 42
From translation exposure to economic exposure	p. 43
Does the translation method matter?	p. 45
A comparison of exchange rate exposure measures	p. 46
Interest rate exposure measures	p. 49
Concluding remarks on traditional exposure measures	p. 55
Measuring translation exposure under the monetary/non-monetary and the all-current methods	p. 56
Purchasing Power Parity and real exchange rates	p. 60
International Fisher Parity	p. 65
Measuring Macroeconomic Impact on the Firm: A Comprehensive Approach	p. 70
Introduction	p. 70
Determinants of cash flow exposure	p. 71
Estimating cash flow exposure	p. 76
Decomposing cash flow exposure	p. 84
Exposure coefficients and sizes of shocks	p. 85
The share price and macroeconomic fluctuations	p. 85
Concluding remarks on the comprehensive approach	p. 86
Measuring Macroeconomic Exposure: The Case of Volvo Cars	p. 88
Introduction	p. 88
Exposure coefficients	p. 89
The choice of dependent variable	p. 90
The choice of independent variables and time horizon	p. 93
Volvo Cars	p. 94
Results, interpretations, and the use of coefficients	p. 101
Using the exposure coefficients for future periods	p. 107
Concluding remarks on the case of Volvo Cars	p. 110
Hedging Macroeconomic Exposure	p. 113
Introduction	p. 113
Derivative contracts and transaction exposure: An overview	p. 114
Practices in managing translation exposure	p. 120
Hedging interest rate and inflation risks	p. 125
Hedging macroeconomic exposure to market price variables	p. 129
Hedging with uncertain exposure using derivatives	p. 135
Taxes and hedge contracts	p. 138
Concluding remarks on approaches to hedge macroeconomic uncertainty	p. 140
Evaluating Cash Flow at Risk	p. 143
Introduction	p. 143
From exposures to Cash Flow at Risk (CFaR)	p. 144
Information requirements for CFaR analysis	p. 147
Norsk Hydro and its exposures	p. 148
Estimating CFaR	p. 151
Hedging exposure to reduce CFaR	p. 152
Concluding remarks on Cash Flow at Risk	p. 153
Strategies for Risk and Exposure Management	p. 155
Introduction	p. 155
Choice of target variable and time horizon	p. 156
Management's risk attitude	p. 159
Price adjustment in goods and financial markets	p. 160
Choice of exposure management strategies	p. 161
Information requirements	p. 164
Adjustability of commercial operations: Real options	p. 167
Concluding remarks on the choice of strategy	p. 169
Recognizing Macroeconomic Fluctuations in Value-Based Management	p. 170
Introduction	p. 170
VBM and macroeconomic fluctuations	p. 171
Cash flow decomposition and valuation: The case of Electrolux	p. 173
Decomposition in performance assessment	p. 176
Taking flexibility into account	p. 177
Concluding remarks about MUST analysis in performance assessment	p. 180
Evaluation, Feedback, and Organization	p. 183
Introduction	p. 183
Managers' incentives and the firm's objectives	p. 184
Realized versus non-realized and anticipated versus unanticipated gains and losses	p. 187
Nominal versus real magnitudes	p. 190
Evaluation of risk management strategies	p. 190
Centralization versus decentralization of risk management	p. 192
Concluding remarks on evaluation, feedback, and organization	p. 195
What Shareholders Ought to Know	p. 197
Introduction	p. 197
Efforts to create standards	p. 200
A comprehensive approach to assessing the impact of macroeconomic fluctuations on the firm	p. 204
Contemporary practice relative to IAS 1 on reporting of macroeconomic influences	p. 205
Illustration of an information release that satisfies the demands of the outside shareholder	p. 212
Concluding remarks on the reporting of the impact of macroeconomic fluctuations on corporate performance	p. 215
Macroeconomic Uncertainty Strategy (MUST) Analysis: A Summary	p. 218
Introduction	p. 218
Shortcomings of traditional methods	p. 219
Measures of corporate performance and exposure assessment	p. 220
Elements of MUST analysis	p. 222
References	p. 226
Index	p. 235
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Corporate Decision-Making with Macroeconomic Uncertainty Performance and Risk Management

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Table of Contents

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