Facing the Consequences in a Global Market

Bob Gross

Thursday, February 05, 2015

With all the news these days about shifting currency relationships, radical oil price trends and sovereign attempts at quelling economic collapse, I’m left with one simple observation:

This is a pretty cool time to be introducing students to the risks multinational firms encounter regarding global transaction, translation and economic exposures!

One of the central themes of our Global Finance course is the evaluation of ‘Consequences’. More specifically, what are the consequences of doing nothing versus the consequences of doing something to soften the impacts of global business risks?

Let me put this into a dollars and cents perspective. Just a few months ago, one Euro was worth about $1.37. As of this writing, that same Euro is worth about $1.12. In more direct terms, if you sold something for 1,000 Euros overseas and expected to be able to convert the Euros you received into $1,370 when you were paid, you might be a tad disappointed with the $250 hit you take when you only got $1,120.

That’s a big difference, and one that gets magnified when you drop the $250 revenue shortfall straight down to the profit line. While some might assume things will even out over a longer period of time, financial performance gets measured over discrete time intervals. Being caught on the short end of that stick can lead to consequences on all sorts of levels. What if the single 1,000 Euro sale was 1,000,000,000 Euros worth of sales or a 1,000,000,000 Euro manufacturing facility at an overseas subsidiary? Suddenly, a modest aberration becomes something that can impact whole-firm value.

As we move further into this year’s earnings season, it wouldn’t surprise me to see a number of companies trying to explain how they got blindsided by the much-publicized recent events and are forced to recognize substantial currency exchange transaction and translation losses.

While most multinational firms have dealt with volatile currencies for some time, they’ll try to assert that the impacts caused by the most recent strengthening of the US dollar were unexpected. McDonald’s is already blaming exchange rates for part of their earnings hit. And a “Forbes” article title says it all for Procter & Gamble: “Profit, Sales Slammed by Currency Devaluations.”

For many companies, the more honest admission would be that they were caught unprepared because they assumed that the volatility would ‘average out’ to a neutral outcome over a short timeframe. What they need to learn, and what our students take away from our course, is that there are tools that can be used to mitigate some or all of those unpredictable risks. Sure, they have costs, but so do the consequences of doing nothing.



Bob Gross
Bob Gross
Bob Gross teaches Financial Management and Global Finance at Lake Forest Graduate School of Management. Bob is a Co-Founder and Senior Managing Director of Prairie Capital Advisors, Inc., and previously served as First Vice President at Merrill Lynch.


(Category: )