The graph below indicates the EBIT of three operating activities (referring to three currencies) for a company's operations, considering the exchange rate scenarios available. Each scenario reflects increase in the value of the foreign currency compared to the home currency. For each of the three operating activities: discuss the relation between EBIT and exchange rate movements, and suggest how the company can achieve internal hedging in order to reduce its economic exposure (if any). Which of the three current operating activities is less risky and why?

Discuss the empirical evidence arguing in favor of and against hedging economic exposure.

Operating Strategies 450 400 350 300 250 200 150 100 - -Activity with currency A 50 *. . . Activity with currency B Activity with currency C Exchange rate senarios 2