| Course | BUS 553 Global Corporate Finance |
|---|---|
| Module | Module 5 |
| Paper type | Currency exposure plan |
| Length | About 1,061 words, 6 pages |
| Format | APA 7 student paper |
| School | Aspen University |
| Program | MBA |
| Updated | October 2026 |
Free sample paper for BUS 553 Module 5
Pounds, Yen and a Weaker Rival's Currency: Measuring and Managing a Guitar Maker's Three Kinds of Currency Exposure
Student Name
MBA Program, Aspen University
BUS 553: Global Corporate Finance
Instructor Name
Month Day, Year
Pounds, Yen and a Weaker Rival's Currency: Measuring and Managing a Guitar Maker's Three Kinds of Currency Exposure
Music City Guitar Works, a composite company in Nashville, Tennessee, makes acoustic and electric guitars sold through music retailers worldwide. Of its $96 million in annual sales, about 20% comes from the United Kingdom and Europe, handled by a distribution subsidiary in London that invoices in pounds, and about 13% from Japan, where it sells through a Tokyo importer in yen. Its main competitors in the premium market include two Japanese guitar makers. Over the past three years, a weaker yen allowed those rivals to cut dollar prices in the United States while Music City's yen revenue shrank. The board has asked for a currency policy. This paper measures the company's exposures and recommends how to manage them.
Three Kinds of Exposure
Shapiro (2013) distinguishes three kinds of currency exposure. Transaction exposure concerns amounts a company has already contracted to pay or receive in another currency, such as open receivables, whose dollar value shifts as rates move. Economic exposure, sometimes called operating exposure, is the effect of exchange rate changes on future cash flows and competitive position. Translation exposure is the effect on reported financial statements when a foreign subsidiary's results are converted into the parent's currency.
| Exposure | Source at Music City | Measure |
|---|---|---|
| Transaction | Receivables due within ninety days | £6.2 million and ¥410 million, about $10.6 million in total |
| Economic | Japanese rivals' costs in yen; forecast yen and pound sales | Estimated $2.9 million drop in annual operating profit if the yen weakens 15% and rivals cut U.S. prices |
| Translation | Net assets of the London subsidiary | £9 million, about $11.4 million |
Why Hedge
Hedging is not automatically valuable, and firms can use derivatives to speculate as easily as to hedge. Allayannis and Ofek (2001), studying large U.S. firms, found that firms' use of foreign currency derivatives significantly reduced their exchange rate exposure, and that the decision to use derivatives was related to their exposure through foreign sales and trade, evidence that firms use derivatives mainly to hedge rather than to speculate. Allayannis and Weston (2001) compared exposed U.S. companies that hedged with derivatives against exposed companies that did not and found the hedgers had higher Tobin's q, a market-based measure of value, with a hedging premium averaging close to 5% of firm value. Whether hedging causes higher value is debated, but the evidence suggests that markets do not penalize firms for reducing currency risk.
Managing Transaction Exposure
Receivables already invoiced are known amounts with known dates. Forward contracts suit them well: Music City can sell the pounds and yen it expects to receive at rates fixed today, eliminating the risk. The policy should hedge 100% of invoiced receivables due within ninety days.
Managing Economic Exposure
Economic exposure is larger and harder to hedge with contracts, because it concerns future sales whose volume depends on prices and competition. Two tools fit. First, options on forecast yen sales for the next twelve months, covering about half of expected volume, would protect against a sharp yen decline while preserving gains if the yen strengthens. Second, operational hedges change the company's structure so that costs and revenues move together. Shapiro (2013) emphasizes that sourcing inputs in the currency of sales and adjusting pricing strategy can reduce economic exposure more durably than financial contracts. Music City could buy more tonewood, cases and electronics from British and European suppliers, paid in pounds and euros, and could shift some Asian component purchases to suppliers that price in yen. Its London subsidiary could also price more of its catalog in pounds with quarterly adjustments, sharing currency moves with retailers.
Translation Exposure
Translation changes reported earnings and equity but not cash, unless the subsidiary's assets are sold or its earnings sent home. Hedging translation exposure with forward contracts would create real cash gains and losses to offset accounting changes, which can increase rather than reduce cash flow volatility. Music City should not hedge translation exposure, and its reports should explain to the board how much of any change in results comes from translation.
How the Yen Hurt Last Time
The yen's decline over the past three years shows why economic exposure deserved the most attention. As the yen weakened, Music City's yen revenue bought fewer dollars, which transaction hedges on receivables could not fix because new sales were priced in yen at levels the Tokyo importer would accept. At the same time, its Japanese rivals' costs, mostly in yen, fell in dollar terms, letting them cut U.S. prices on comparable guitars by about 8%. Music City lost share in its home market without any change in its own costs or quality. Neither its accounts receivable nor its balance sheet showed this exposure; only an analysis of competitors did.
Pricing as a Tool
How Music City prices abroad also determines who bears currency risk. Invoicing the Tokyo importer in dollars would move the risk to the importer, but the importer would likely resist or demand lower prices, and Japanese retailers expect yen pricing. A middle path is a price list in yen with a clause allowing adjustment each quarter if the exchange rate moves more than 7% from a reference rate, sharing large moves between the two companies.
Governance
The policy should be approved by the board and specify permitted instruments, forwards and purchased options; hedge ratios for each exposure; counterparties limited to the company's two relationship banks; a ban on selling options except as part of approved collars; and a monthly report to the audit committee showing exposures, hedges and their market values.
What Remains Exposed
Even with the policy, a sustained shift in the yen would erode Music City's competitive position in Japan and the United States over several years, since options protect only the next twelve months. Long-term protection depends on operational choices, such as sourcing and product positioning, that make the company less vulnerable to Japanese rivals' currency advantage.
Conclusion
Music City's exposure comes in three forms, and each needs its own response. Forwards remove the risk on receivables, options and operational changes address the larger economic exposure, and translation is reported rather than hedged. Research suggests firms that hedge in this way reduce their exposure and are valued at least as highly as those that do not, and clear governance keeps the program a hedge rather than a bet.
References
Allayannis, G., & Ofek, E. (2001). Exchange rate exposure, hedging, and the use of foreign currency derivatives. Journal of International Money and Finance, 20(2), 273-296. https://doi.org/10.1016/S0261-5606(00)00050-4
Allayannis, G., & Weston, J. P. (2001). The use of foreign currency derivatives and firm market value. Review of Financial Studies, 14(1), 243-276. https://doi.org/10.1093/rfs/14.1.243
Shapiro, A. C. (2013). Multinational financial management (10th ed.). Wiley.
What the BUS 553 Module 5 instructions ask for
The Aspen catalog includes managing currency exposure among the global finance topics of BUS 553, and the fifth module usually asks students to identify a company's exposures and recommend how to manage them. Use your classroom's posted directions for Module 5; this example builds a full exposure plan for one company. Describe the company's foreign revenues, costs, assets and competitors. Separate transaction, economic and translation exposure and measure each with numbers. Use research on whether and why hedging adds value. Consider operational responses, such as where the company buys inputs and how it prices, alongside financial hedges. Recommend instruments, hedge ratios and governance, and explain what each part of the plan protects against and what it leaves open.
How this BUS 553 Module 5 example is built
The paper opens with Music City Guitar Works, its $96 million of sales and its London subsidiary. A table measures exposure: £6.2 million and ¥410 million of receivables due within ninety days, an estimated $2.9 million drop in annual operating profit if the yen weakened 15% and Japanese rivals cut prices, and £9 million of subsidiary net assets subject to translation. Allayannis and Ofek's Journal of International Money and Finance study found that firms' use of foreign currency derivatives significantly reduced their exposure, consistent with hedging rather than speculation. Allayannis and Weston's Review of Financial Studies study found that firms using currency derivatives had higher Tobin's q. Shapiro's text frames operational hedges, such as buying more tonewood and hardware in pounds. A policy follows with forwards for receivables, options for forecast yen sales and a rule against hedging translation.
Reading the BUS 553 Module 5 grading rubric
Currency exposure plans are judged on precise separation of exposure types, credible measurement, appropriate use of research and a policy whose instruments match the exposures. This paper defines and measures transaction, economic and translation exposure separately in a table, so the grader can see that each requires a different response. Allayannis and Ofek's Journal of International Money and Finance study and Allayannis and Weston's Review of Financial Studies study supply evidence on why firms hedge and how markets value it, cited where they shape the policy. Shapiro's Multinational Financial Management supports the use of operational hedges. The decision not to hedge translation exposure, with its reason, shows understanding that accounting effects and cash effects differ, which separates a thoughtful plan from a mechanical one.
Common BUS 553 Module 5 mistakes, and how to avoid them
Exposure papers frequently stop at transaction exposure, the easiest to see, and miss economic exposure, which can be larger. Ask how currency moves affect competitors and customers, not only receivables. Another error is hedging translation exposure as if it were a cash flow; explain the difference and decide deliberately. Measure each exposure with numbers and state assumptions. Match instruments to exposures: forwards suit known amounts, options suit uncertain ones. Do not forget operational hedges, such as sourcing inputs in the currency of sales, which can be cheaper and more durable than financial contracts. Set limits and reporting, so hedging cannot become speculation. Finally, explain what the plan leaves exposed, since no plan removes all currency risk.
Write yours, or have the desk draft it
This paper is an original model document written by our desk, not a submitted student paper and not an official Aspen University document. Read it for the moves, then write your own to the instructions in your classroom. If you want one built to your exact prompt and rubric, the first custom sample is free and arrives in 24 to 48 hours.
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BUS 553 Module 5 questions, answered
What does BUS 553 Module 5 usually ask for?
Aspen's BUS 553 covers managing currency exposure in this module, so identifying a company's transaction, economic and translation exposure and recommending how to manage it is typical. Check your classroom prompt.
What is economic exposure?
The effect of exchange rate changes on a company's future cash flows and competitive position, such as rivals gaining a price advantage when their currency weakens.
Should companies hedge translation exposure?
Many do not, because translation affects reported figures rather than cash; hedging it can create real cash gains or losses to offset accounting effects.
Where can I find a free BUS 553 Module 5 sample paper?
The full plan appears above: a guitar maker's three kinds of currency exposure measured in a table, research on hedging and firm value, natural hedges and a currency policy.
Does hedging increase firm value?
Allayannis and Weston reported that American companies hedging currency risk with derivatives traded at higher valuations on average, though whether hedging causes this is debated.