t=0 t=1

US dollars Yen US dollars

@108¥/$ JPY 108 @103¥/$
Operating revenues $1,000 JPY 108,000 $1,200
70% -Variable operating costs 700 75,600 $840
EBIT $300 JPY 32,400 $360
16.67% -Taxes @16.67% $50 5,401 $60
EBIAT $250 JPY 26,999 $300
+Depreciation 50 5,400 50
EBITDA or O $300 JPY 32,399 $350

%Δ¥ 4.85% % Δ $ -4.63%

% Δ O($) 16.67% % Δ O( ¥) 11.27%
$ ¥
E O ¥ E O $
3.43 -2.43
t=1
Yen
JPY 103
JPY 123,600
86,520
JPY 37,080
6,181
JPY 30,899
5,150
JPY 36,049
 o Measuring operating cash flow exposure from two different currency perspectives
an example presented in the text.
 CASE 1: A firm whose operating cash flows are priced in euros buys
aluminum from the US. Everything is priced in euros and the euro depreciates
by 20% relative to the US dollar.
 The first panel shows the impact on operating cash flows to a European
firm conducting business in euros. Since everything is priced in euros,
operating cash flows in euros do not change. Operating exposure is zero.
 The second panel shows effect on operating cash flows from the
perspective of a US firm conducting business in Europe. Revenues,
expenses and taxes are priced in euros and are converted to US dollars at
the spot rate. When the euro depreciated relative to the US dollar, the
euros turned into fewer dollars and dollar cash flows declined from $176
to $141. Since the entire income statement was priced in euros, operating
exposure is 1.00. This means that a one percent depreciation in the euro
resulted in a one percent reduction in operating cash flows.

Dollars per Euro Dollars per Euro

t=0 t=1 t=0
1 0.8 1
Revenue € 600.00 € 600.00 Revenue $600
Production Expense 240 240 Production Expense 240
Aluminum 150 150 Aluminum 150
Depreciation 40 40 Depreciation 40
EBIT € 170.00 € 170.00 EBIT $ 170
20% Taxes @ 20% 34 34 Taxes @ 20% 34
EBIAT € 136.00 € 136.00 EBIAT $ 136
Plus Depreciation 40 40 Plus Depreciation 40
EBITDA € 176.00 € 176.00 0 EBITDA $ 176

FX $/€ 1 0.8 0.25 FX €/$ 1

OCF Exposure 0 + OCF Exposure

(1 7 6  1 7 6 ) (1 4 1  1 7 6 )
$
 176  0 .0 176
E E eu ro
  1 .0
O euro
( 1 . 0 0  0 .8 0 ) O $
( 0 .8 0  1 . 0 0 )
0 .8 0 1 .0 0
$
EOeuro  EOeuro
$ 1

 Two operating cash flow FX exposures sum to 1. This means that the currency
perspective is not dependent upon where the firm in located.
 cy perspectives

s buys
euro depreciates

o a European
ed in euros,
posure is zero.
m the
evenues,
US dollars at
dollar, the
ed from $176
uros, operating
n in the euro

Dollars per Euro

t=1
0.8
$480
192
120
32
$136
27.2
$109
32
$ 141 -0.2

1.25 -0.2
1.00 1.00

s that the currency

  CASE 1: A firm whose operating cash flows are priced in euros buys
aluminum from the US. Everything is priced in euros and the euro depreciates
by 20% relative to the US dollar.
 Panel I: Revenue, cost and operating cash flow exposures are zero since
revenues and costs are priced in euros are not affected by the euro’s
depreciation relative to the US dollar.
 Panel II: Revenue, cost and operating cash flow exposures are 1.00 since
revenues and costs are priced in US dollars and are affected by the euro’s
depreciation relative to the US dollar.
 An exposure of 1.00 is referred to as pure FX conversion exposure. This is
because a one percent movement in the non-base currency causes a one
percent movement in revenues, costs and operating cash flows.

Dollars per Euro Dollars per Euro

t=0 t=1 t=0
1 0.8 1
Revenue € 600 € 600 0 Revenue $600
Production Expense 240 240 Production Expense 240
Aluminum 150 150 Aluminum 150
Depreciation 40 40 Depreciation 40
EBIT € 170 € 170 EBIT $170
20% Taxes @ 20% 34 34 Taxes @ 20% 34
EBIAT € 136 € 136 EBIAT $136
Plus Depreciation 40 40 Plus Depreciation 40
EBITDA € 176 € 176 0 EBITDA $176
Total Cost 424 424 0 Total Cost 424

FX €/$ 1 0.8 0.25 FX €/$ 1

OCF Exposure 0 + OCF Exposure
Revenue Exposure 0 + Revenue Exposure
Cost exposure 0 + Cost exposure
s buys
euro depreciates

are zero since

he euro’s

are 1.00 since

d by the euro’s

xposure. This is
causes a one
ows.

Dollars per Euro

t=1
0.8
$480 -0.2
192
120
32
$136
27
$109
32
$141 -0.2
339 -0.2

0.8 -0.2
1 1.00
1 1.00
1 1.00
  CASE 2: The same as the one above except that Aluminum is priced in US
dollars instead of euros:
 The first panel shows the impact on operating cash flows to a European
firm conducting business in euros. Since aluminum is priced in US dollars
operating cash flows in euros change. Operating exposure is -0.68. A one
percent appreciation in the US dollar caused operating cash flows in euros
to decline by 0.68%.
 The second panel shows effect on operating cash flows from the
perspective of a US firm conducting business in Europe. Revenues,
expenses, except for aluminum, and taxes are priced in euros and are
converted to US dollars at the spot rate. When the euro depreciated
relative to the US dollar the euros turned into fewer dollars and dollar cash
flows declined from $176 to $117. Operating exposure is 1.68. One
percent depreciation in the euro caused a 1.68% reduction in operating
cash flows.

Dollars per Euro Dollars per Euro

t=0 t=1 t=0
1 0.8 1
Revenue € 600 € 600 Revenue $600
Production Expense 240 240 Production Expe 240
Aluminum 150 188 Aluminum 150
Depreciation 40 40 Depreciation 40
EBIT € 170 € 133 EBIT $170
20% Taxes @ 20% 34 27 Taxes @ 20% 34
EBIAT € 136 € 106 EBIAT $136
Plus Depreciation 40 40 Plus Depreciatio 40
EBITDA € 176 € 146 -0.17 EBITDA $176

FX $/€ 1 0.8 0.25 FX €/$ 1

OCF Exposure -0.68 + OCF Exposure

(1 4 6  1 7 6 ) (1 1 7  1 7 6 )
176 176
E $
   0 .6 8 E euro
  1 .6 8
O euro
( 1 . 0 0  0 .8 0 ) O $
( 0 .8 0  1 .0 0 )
0 .8 0 1 .0 0
$
EOeuro  EOeuro
$ 1

 Two operating cash flow FX exposures sum to 1. This means that the currency
perspective is not dependent upon where the firm in located.
m is priced in US

ows to a European
priced in US dollars
sure is -0.68. A one
g cash flows in euros

s from the
pe. Revenues,
n euros and are
o depreciated
ollars and dollar cash
e is 1.68. One
ction in operating

Dollars per Euro

t=1
0.8
$480
192
150
32
$106
21
$85
32
$117 -0.34

1.25 -0.2
1.68 1.00

(1 1 7  1 7 6 )
176
  1 .6 8
( 0 .8 0  1 . 0 0 )
1 .0 0

This means that the currency

in located.
  CASE 2: The same as the one above except that Aluminum is priced in US
dollars instead of euros.
 Panel I:
 Revenue exposure is zero since revenues and costs are priced in euros and are not affec
euro’s depreciation relative to the US dollar.
 Cost exposure is 0.28 since the cost of aluminum is priced in US dollars.
 Operating cash flow exposure is -0.68 because revenue is not exposed but costs are ex
 Panel II:
 Revenue exposure is 1.00, pure FX conversion exposure, since revenues are priced in U
are affected by the euro’s depreciation relative to the US dollar.
 Cost exposure is 0.72 since the cost of aluminum is priced in US dollars.
 Operating cash flow exposure is 1.68 since both revenue and cost are exposed.
 FX pass-through:
 In the above example, the zero exposures occurred because the firm could pass any FX ef
to their supplier or customer. Exposures of one meant that the firm was unable to pass thro
FX effects. Exposures between zero and one meant that the firm was able to pass through
all, of the FX effect.

Dollars per Euro Dollars per Euro

t=0 t=1 t=0
1 0.8 1
Revenue 600 600 0 Revenue 600
Production Expense € 240 € 240 Production Expense $ 240
Aluminum 150 188 Aluminum 150
Depreciation 40 40 Depreciation 40
EBIT € 170 € 133 EBIT 170
20% Taxes @ 20% 34 27 Taxes @ 20% 34
EBIAT € 136 € 106 EBIAT $ 136
Plus Depreciation 40 40 Plus Depreciation 40
EBITDA € 176 € 146 -0.17 EBITDA $ 176
Total Cost  424 454 0.07 Total Cost  424

FX €/$ $ 1.00 $ 0.80 0.25 FX €/$ $ 1.00

OCF Exposure -0.68 + OCF Exposure
Revenue Exposure 0.00 + Revenue Exposure
Cost exposure 0.28 + Cost exposure
priced in US

d in euros and are not affected by the

n US dollars.
t exposed but costs are exposed.

nce revenues are priced in US dollars and

lar.
n US dollars.
d cost are exposed.

firm could pass any FX effects through

rm was unable to pass through any of the
was able to pass through some, but not

Dollars per Euro

t=1
0.8
480 -0.2
$ 192
150
32
106
21
$ 85
32
$ 117 -0.34
363 -0.14

$ 0.80 -0.20
1.68 1.00
1 1.00
0.72 1.00