Managing Operating Exposure and FX Risk 1 Carlos Ghosn having been named CEO of Nissan in 1999, the company

was experiencing a loss of $6 billion annually. Additionally the companys massive debts and a damaged brand necessitated the input of Ghosn. It was important for the companys state to be understood before the strategies that the CEO had could be implemented. Therefore, Ghosn firstly determined how deep the financial stagnation had reached. As an initial step of the mitigating the financial exposures, the management defined the corporate philosophy and objectives. Among the planned objectives were, reducing purchasing costs by 20%, displacing 20,000 odd workers via layoffs and attrition, closing five plants and reduce capacity by 30 percent. After identifying the exposures, the management were expected to quantify the level of effect to the companys operations. Among the categories of exposures in the company were, translational, transactional and operating exposure. However, the financial stagnation was an operational exposure which was economic in nature and arose from foreign competition. Although the identification and measurement was successful, the capturing of the exposure is difficult compared to the other two exposures (Napolo, 2005). Once the exposure has been quantified, the definition of risk management policies and procedures helps during the hedging process. In the process, a range of acceptable hedging activity should be established in order for each aspect of the exposure to be addressed. Strategies for risk management are identified ensuring that approved derivative strategies reflect established procedures. Examples of derivative strategies include forward contracts, forwardequivalent option-combination strategies, and purchased options. For Nissan, purchased options and option-combining strategies were applicable as the competitive international environment necessitated an upside potential from currency movements (Kim, 2001).

Managing Operating Exposure and FX Risk 2 The indentified strategies are then executed such as a hedge using a derivative instrument. At this stage, the individuals approved to enter into transactions are established. Similarly, the levels of approval depending on the size and nature of transaction are specified. Counterparties each with credit limits for outstanding positions are identified. In order to ensure effectiveness at this point, the appropriate implementation of internal controls will be ensured. This last stage will also involve independent confirmation of trades. The second last stage is the monitoring of exposures and hedges to ensure performance through the mark-to-market results in financial statements for derivatives. Monitoring of the underlying exposures are meant to ensure that the position is not over-hedged or under-hedged (Choi, 1989). Finally, the process is culminated by review and performance measurement. Because risk management is a continuous process, there is need for continual review of policy on an annual basis.

Managing Operating Exposure and FX Risk 3 References Kim, Yong-Cheol & R. McElreath (2001) "Managing operating exposure: A case study of the automobile industry", Multinational Business Review. Detroit: Spring 2001. v 9, Iss. 1; pg. 21-27. Book Review (2005) "The gaijin who saved Nissan", Business Week,1/17/2005, accessed 5/16/2009 at: http://www.businessweek.com/magazine/content/05_03/b3916021_mz005.htm Napolo, D. (2005) "Managing FX risk; an eight step plan to establish corporate foreign exchange policy", Treasury & Risk Management magazine, March 2005. Accessed 5/16/2009 at: https://www.wellsfargo.com/downloads/pdf/com/focus/risk/manage_fx_risk_reprint.pdf Jorio, Philippe (1990). The Exchange-Rate Exposure of US Multinational, Journal of Business 63(3), 331-346. Choi, Jongmoo Jay (Spring1989), Diversification, Exchange Risk, and Corporate International Investment, Journal of Internatioal Business Studies, 145-155.