Note on Transaction and Translation Exposure

W. Carl  Kester; Richard P. Melnick

Background Note | HBS Case Collection | September 1987 (Revised November 1992)

Note on Transaction and Translation Exposure

by W. Carl Kester and Richard P. Melnick

Abstract

Describes the transaction and translation exposures that companies doing business internationally face when foreign exchange rates change. Also discusses how to measure and cover both types of exposure. Covering techniques are demonstrated using examples of forward cover, money market hedges, and options market hedges. Other covering devices, such as swaps and leads and lags, are also presented. Explains how these exposures relate to each other and what can be done to minimize overall foreign exchange risk.

Keywords: Currency Exchange Rate; International Finance;

Format: Print

10 pages

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Citation:

Kester, W. Carl, and Richard P. Melnick. "Note on Transaction and Translation Exposure." Harvard Business School Background Note 288-017, September 1987. (Revised November 1992.)

In March 2013, Apple Computer has a very large cash balance, and is under pressure to return cash to shareholders. Hedge fund manager David Einhorn thinks Apple can "unlock value" by issuing perpetual preferred stock, dubbed iPrefs. Henry Blodget, CEO of Business Insider, disagrees, saying "you can't just wave your magic wand and make something of nothing." This short case is designed to support a discussion of "perfect" markets and the Modigliani-Miller capital structure irrelevance propositions. The case focuses on two questions: (1) From a shareholder's perspective, how is Apple's cash different from cash in a bank or money market account? (2) Can Apple create significant value for shareholders by splitting each common share into an iPref plus a common share?

Case | HBS Case Collection | January 2018 (Revised December 2018)

Capital Allocation at HCA

W. Carl Kester and Emily R. McComb

In early 2017, HCA Holdings, an investor-owned hospital management company, faced a strategically important capital allocation decision. After the exit of its private equity sponsors in 2016, HCA had to determine how best to allocate its substantial annual free cash flows among several competing alternatives. Equity analysts and some mutual fund investors were clamoring for the company to initiate regular quarterly dividends, while some other hedge fund investors were eager to see more share repurchases. Other choices being advocated by various parties included reducing leverage to improve HCA's credit rating to investment grade, spurring growth by initiating a major acquisition program or reinvesting heavily in existing markets to enhance HCA's strong competitive position. These choices had to be made in the face of uncertainty about the future of healthcare regulation and tax policy following the 2016 U.S. presidential election and in the context of its closest publicly traded peers struggling with heavy debt burdens. HCA's capital allocation choices would be crucial to its ability to provide high quality health care to patients, implement its corporate strategy, and deliver value to shareholders.

Keywords: capital allocation; cash distribution policy; dividends; Share Repurchases; growth strategy and execution; growth investing; Capital expenditures; debt management; Debt reduction; debt policy; hospital management; investor-owned hospital chains; Capital Budgeting; Capital Structure; Cash Flow; Corporate Finance; Decision Choices and Conditions; Health Industry; United States;

Citation:

Kester, W. Carl, and Emily R. McComb. "Capital Allocation at HCA." Harvard Business School Case 218-039, January 2018. (Revised December 2018.) View Details

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Note on Transaction and Translation Exposure

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