Life Cycle Analysis To Assess District Energy

Life Cycle Analysis To Assess District Energy Introduction Life Cycle Analysis is the method used by individuals working in procurement to assess District Energy. This is done so as to understand the amount needed to create cooling on the site; though this analysis is carried out for the duration of 20 40 years and then it is equated with district cooling proposal. The concept of Life Costing is being widely used because of the productivity associated with it. Practically, mechanical / electrical equipment live short lives, but energy consumption, maintenance and renewal programmes are expenses. Both present and future costs are genuine, Example, in a rolling maintenance programme for major installations capital comes from the same fund. If these situations can be met then whole-life costing is vital. (Ferry 1964) Use of Whole life costing methods within the mechanical and electrical installations s most profitable since the amount of money spent on these is always growing. Variances between expenditure and running cost are constant in evaluation of energy-consuming systems. Drawbacks affecting calculations for whole-life costing is unaccountable in building fabric, because, Firstly, running costs of energy-consuming systems equate to considerable sum of the total whole-life costs. Secondly, restrictions on life span of mechanical / electrical installations and since they become obsolete quickly imply these installations should be considered for shorter periods as compared to building fabric. Thirdly, assumptions are held over short period time frames, any hypothesis on cost, interest rates and taxation are possibly more legitimate. (Ferry 1964) Fig 4.1 displays the proportional values of the various life cycle costs that a building owner would need to consider in order to produce cooling on site. (Damecour 2008) As can be seen in the above diagram, there are 3 clear parts to manufacture cooling on site; Natural gas or electricity, Operation and maintenance and Capital. Capital costs Capital for equipment is a fraction of the total installation cost. It is critical to consider this when deciding on what amount can be reduced by using district cooling system. For example in chiller plants, the chiller and cooling towers make up 25% of total cost. [See fig4.2] (Damecour 2008) Operation and maintenance: To operate chillers and cooling towers there is a need for well trained staff and budget for wear and tear of machines. Chillers need water and chemicals to work accurately. It is mandatory for the owner to insure all heavy machinery such as boilers, chillers and cooling towers. Besides, heavy machinery is sold with warranty contracts. Details of Case Study This case study evaluates the capital connected with a district cooling plant and Air cooled chiller package, but over a time frame of 30 years. The particulars of both are below. District Cooling Plant Employer: Emirates Central Cooling Systems Corporation (EMPOWER), Dubai Engineer for the Works: Ellerbe Becket Inc and Tebodin Middle East Ltd. Scope of work: The capacity of the job involved supply, installation, testing and commissioning of a central cooling plant. The plant will have a capacity of 56,000 tonnes of refrigeration. The specification of the building is 135 metres long x 40 metres wide and 37 metres high from basement floor level to the top of the parapet wall. Transgulf Electomechanical LLC, are the contractor on this project and will perform all functions relating to mechanical, electrical, process, civil and architectural components, including supply and installation of machinery. The capacity of work extends towards supply and installation of the instrumentation and controls in two phases for up to 40 ETSs (Energy transfer stations) located in developers buildings around DHCC area and wiring them back to the central plant. It includes engineering as required, procurement and provision of manpower, materials, equipment and two years defect liability period. Project Time Schedule: In March 2008, the first 18000 tons of refrigeration has been connected to the pipeline network. The balance load will happen during part II of the work. The details of the equipment installed are indicated in the Annexure 4.1. District cooling system model Firstly, chilled water is scattered between DCS and buildings through a three-level chilled water piping system, which comprises of production loop with constant speed pump. Each chiller has a dedicated production loop pump, and the two are controlled together. Secondly, distribution loop pumps defeat pressure loss, as acquired by chilled water flowing between DCS and the buildings. Distribution is hydraulically separated from production loop by existence of separate bypass pipes between the loops. All distribution loop pumps have changeable speed. Thirdly, secondary loop in each building includes a number of changeable speeds, with variable flow chilled pumps, for distributing chilled water through the airside apparatus in the building. Heat exchangers are built-in to segregate distribution loop of DCS from secondary loop in each building, which keeps system pressure in the distribution loop at a low. Lastly, there are total 4 zones T1, T2, T3 and T4 as indicated in the drawing (Fig 4.3) which shows the location of the ETS stations and the load detail. The load details of Phase I are in Annexure 4.2. Air Cooled Chiller Package Transgulf Electromechanical has provided information on air cooled chiller package for comparison. Employer : Dubai World Trade Centre Engineer : RMJM consultants. Capacity of chiller : 275 TR Type : Air cooled chiller Information on machinery, model number and power consumption are in annexure 4.3. Factors considered for costing 1. The real cooling capacity that a building needs is a much lower number than the chiller capacity. On the basis of the design cooling loads predicted for the twenty one buildings in four building zone the connected load is 18000 TR and the actual load is 15738 TR. Accordingly the district cooling plant is designed for 8 chillers working (8 x 2000 TR = 16000 TR) and 1 standby (2000 TR). The connected load (17796 TR) correlates to sum of fixed capacity of the chiller plants needed by each building if each had a plant, but 16000 TR relates to the cooling capacity required of a DCS to serve 21 ETS stations. Outcome of diversity in cooling load among buildings can be taken advantage of by using district cooling plant to serve groups of buildings. Air cooled chiller packages are in multiples of 275 TR (66 chiller packages) as total load of 18150 TR to be fixed in 21 buildings. 2. Study is based on NPV (present worth value) and EAC (equivalent annual cost); across initial and operating costs. Choice depends on which requires least LCC (life-cycle cost) and can execute the duty for its life span. (Al Daini et al 2002). Comparisons are made only between co-terminated proposals, to guarantee comparable results. Co-termination means, lives of systems involved end at the same time, which is not the case in this work. When alternatives have unequal lives, time span for analysis can be set by common multiples of system lives or a study period ending with disposal of all systems. Common-multiple method is used to accommodate NPV for unequal-life systems. Like in this case study, least common multiple is 30 years for the district cooling plant. This means the air cooled chilled package has a lifetime of 15 years; and would be substituted once during the analysis period. The total NPV for analysis is derived by adding the NPV of single entity considered, both future single payment (i.e. replacement cost) items and series of equal future payment (i.e. annual operating cost). The value of money is the job of available interest rates and inflation rate. In equivalent annual method, all costs incurred over time are changed to an equal yearly amount. The EAC comparison method is most fitting, especially for systems that comprise of many subsystems with unequal life spans. In this case, there is no need to assume the replacement of a system. 3. Owning Costs: Economic analysis demands derivation of first cost and operational costs for every projected selection. It is significant in correctly assessing to reach a final decision, for overall approach and system choices. Life cycle cost evaluation comprises of first costs, utility costs, maintenance costs, operational costs, utility escalation rates and owners cost of money. (Richards et al 2000). There are four rudiments to calculate annual owning costs: Initial cost, Analysis or study period, Cost of capital and other periodic costs like replacement, refurbishment or disposal fees. These combined with operating costs, equates to economic analysis. (ASHRAE 2003) Initial costs A fair ballpark of capital cost of parts has resulted from cost records of installations of similar le design or quotations from manufacturers and contractors or referring market available cost- estimations. Analysis period Time span during which an economic analysis is carried out affects the outcome. This is decided by clear objectives, like length of planned ownership or loan repayment period. As the length of time in analysis period grows, the net present value decreases. The time period is not affected by equipment depreciation or service life, though it may be valuable for the study. In this study a single design life of 15 years was used to show a midway point between small and medium capacity equipment range for air cooled chiller package. Smaller equipment has a life span of 10 to 15 years while medium size equipment has 15 to 20 years. (Archibald et al 2002) In district cooling plants, machinery is all large scale and has a life span of 30 to 40 years as declared by district solution providers (Tabreed 2007). Though, in this analysis 30 years is considered to minimize the intricacy and work. Interest or discount rate Borrowed capital has high interest rates, albeit this rate is not apt enough to use in the study. Discount rate instead is used to give the actual value of money. This rate is affected by individual investment and profit, while interest rates are fixed. (ASHRAE 2003) Most establishments use WACC to calculate costs of capital as organizations can produce capital through debt or equity. Although return required for equity and debt is varied, debt holders have high risk as they access the organizations profits. Hence cost of the capital is calculated by taking a weighted average of both, and the weightings are introduced by level of debt and equity in the companys asset base, or the companys gearing. (EMA 2002) This estimation is from the hypothesis of cost of capital as 10% (as per break up in Annexure 4.4) to DCS by private sector. Operating costs Operating costs comprises of; cost of electricity, wages of employees, supplies, water, materials, chemicals and annual frequent costs associated with functioning of the system. For the vapor compression system, operating costs are subject to electricity needed to work the compressor. Extra electricity is needed to work the condenser water pump and cooling tower fans. This has been regarded in the calculation. DEWA tariff has also been considered. Wages are as per current UAE market rate. Maintenance Costs Maintenance cost is equal to final cost estimated for air-conditioning systems. Most frequently used maintenance towards building HVAC services are run-to-failure (unsuitable for the hospital), preventive, and predictive maintenance. Run to failure, capital is not spent until the machinery gives way. Preventive maintenance is planned by run time or calendar. Predictive maintenance is done by supervising machinery and using condition and performance indices to increase repair intervals. HVACR maintenance and utility costs form a high percentage of operating cost, hence it is critical to reduce cost on maintenance by managing the process well. Maintenance cost is hard to measure as it is liable on many variables like local labor rates, experience, age of the system, length of time of operation, etc. Although a fair prediction is derived from quotations for repairs and Annual maintenance contracts. Sensitivity analysis Most whole-life cost calculation includes a lot of suppositions and it is not probable to get the effect of change in these practically. One method of testing results attained from whole life cost calculation is to repeat the calculations in a methodical way, changing the value of a single variable (i.e. assumption) each time, and then one can see how sensitive results are to changes in the variable under consideration. Results if seen on a graph can show when; example, one component becomes more attractive than another. (Ferry 1964) Consequently, sensitivity analysis was done to learn the effect of change in DEWA tariff rate on life costs by keeping all parameters same and results are reflected in Figure I and Figure IV. Also the same was done by changing hours of operation; results are seen in Figure III and Figure VI. Explanatory notes to the costing Capital costs Air cooled chiller package 275 TR chiller package is used for contrast study as data of cost and power usage are accessible for a recent project completed in 2007 (Dubai World trade centre) Design fees are taken @ 4 % as per market trend in contracting business in Dubai. Total load requirement as per ETS integrator data is 18,000 TR which needs 66 number of 275 TR air cooled chiller packages. Hence cost as per 66 chiller packages was noted. District cooling plant The capital cost figures shown are for a recently executed project (Phase I completed in March 2008) at Dubai Health care city. Architect/Consultant fees are taken @ 8% as per market trend in contracting business in Dubai. Plant is constructed for 56,000 TR capacity. Civil cost should be allocated to 56,000 TR . Though this difference was not made in capital cost. Chiller cost is 18,000 TR (2000 TR x 9nos) in line with phase I ETS load. Land cost is taken from Dubai rent prices in 2006 in the Dubai Health care city. (UAE property trends 2006) Economic calculation requires consideration towards the space for the cooling machine which will be vacated for other purposes since the consumer is connected to the DC network (Soderman 2007). Although this was not considered in the calculation. Operating costs District cooling plant Power consumption for the plant is from SCADA reports as per annexure 4.5. The power consumption charges are assumed at 20 fils/kwh as per DEWA tariff rates from May2008. Sensitivity analysis by changing the rate to 33 fils/kwh is also done to learn the influence of revised rates from DEWA since June2008. Dubai health care city has residential, hospital buildings and office buildings and so has different running hours. Running hours are assumed as 4800 hrs per year (16 hours /day x 300 days working) and all calculations are based on 4800 hrs of operation. Results for operating at 3200 hrs and 6000 hrs are evaluated. Water costs are assumed as 4 fils/gallon as per DEWA tariff and run hours are 4800 hrs as per above. Air cooled package Power consumption is assumed as 20 fils/kwh as per DEWA tariff rate from May 2008. Since the start of slab tariff, consumption charges for each chiller package will be 20 fils/kwh as total consumption would not exceed the slab. Water and chemical requirements are not applicable for air cooled chiller package, since cooling tower is removed and chilled water system being a closed system the makeup water requirements are irrelevant to consider in costing. Life cycle costs are from budget costing figures formulated from basic equipment sizes, not detailed design solutions. This is supposed to be precise for comparison. 4.5 Inferences from cost comparison Figure I Figure IV District cooling plant has huge initial capital cost, though in the long term it is more advantageous. According to present worth method, district cooling is advantageous from 13th year when present worth becomes lower than air cooled chiller package, which is even before replacement of the chiller package. As operating and maintenance costs are sizably less with the same tariff for electricity as per before May 2008. Since the start of slab tariff rates for electricity from May 2008, air cooled chiller package NPV is lower than district cooling. As increase in operating costs of district cooling because of higher tariff (33 fils/kwh) when compared to air-cooled chiller package (20 fils/kwh) neutralises the advantage of less power consumption per unit of cooling produced by district cooling as compared to air cooled chiller package. Thus the massive disparity in capital costs of district cooling makes it not worth. Figure II In district cooling, capital cost is 56% while operation and maintenance is 44% of the cost. Compared to air cooled chiller package, initial capital investment is 30% while operation and maintenance is 70%. Hence throughout a life cycle of 30 years, OM costs for air cooled chiller package are much higher than the benefit of low capital investment. With equivalent annual cost method, district cooling plant is beneficial when weighed against air-cooled chiller package. Figure III and Figure VI 1. Operating hours of a cooling plant differ widely with use, example the chiller plant in typically HVAC equipment in commercial buildings run for a portion of 2,500 to 3,500 hours that the building is occupied. But in the industrial sector, commercial cooling systems are expanded to comprise of process cooling and function on two shifts or around the clock. Here it is possible to note that the plant runs for 8,000 hours per year. (Archibald et al 2002) Cost differentiation shows as operating hours lessen, differences in present worth between the DCP and ACC reduces. As hours of operation lessen, OM costs lessen and DCP loses the advantage to ACC. Although with more operating hours DCP becomes much more attractive than ACC. 2. As per the present worth method, DCP becomes productive from 15th year, the present worth becomes less than ACC because of substituting of the chiller package with 3600 hours of operation, in the 13th year with 4800 hours of operation and in 9th year of operation with 6000 hours of operation. Here it is visible how costs; except initial capital costs; can influence decisions. Figure V Comparison of DCP and ACC considering inflation is shown. Rates supposed for inflation the difference in costs of ACC and DCP over 30 years increases as compared to the cost comparison without inflation. District cooling system considerations and benefits. High cooling load demand and density are predominant reasons to select District Cooling. It is most commonly seen in universities, government facilities and hospitals, or in office and industrial complexes and high- rise urban districts. A high load density means a less extensive distribution system, which is very expensive. Shorter runs also minimize thermal and pressure losses and maintenance costs. A desirable companion to high load density is a favorable load factor. Means that the aggregate load over time tends to approach the peak block load condition. This analysis considers both factors, thus making DCP a better option. Infrastructure Requirements District Cooling Scheme needs a central plant and a central pipeline network to function. Consideration of these site necessities for district cooling facilities in planning and programming process for Strategic New Development areas in the beginning stage is priority to hold the master plans and certain easy execution of District Cooling Scheme. (Parsons 2003) Due to fast paced construction process any changes to the master plans and infrastructure corridors, can severely impact the completion of the district cooling project. Traffic Impact Review Since some of the pipelines laying works need to be on busy roads it is important to have an extensive Traffic Impact Assessment. For Dubai health care city careful notification was provided to the stakeholders to guarantee no inconvenience was caused due to pipeline installation. Under Ground Congestion These are higher than anticipated costs since there may be unexpected costs relating to congestion in underground services. These need to be overcome primarily in the planning process. (IDEA 2007) Chilled Water Temperature Differential Low chilled water temperature differential (Ά T) is a major district cooling weakness. Poor Ά T performance at cooling coils means lost cooling capacity, wasted energy, extra cost and added complexity for a thermal utility, its chilled water customers, or both. Health care city district cooling plant has power consumption of 1.12 kw/tr which is more than the desired consumption of less than 1 kw/tr due to low chilled water temperature difference. This increases operating costs. To encourage customers to invest in technology to improve Ά T performance in their buildings, an increasing number of utilities have established chilled water rates that vary inversely with Ά T . Figure 4.4 is an example of rates charged to customers from one prominent university in the United States. As can be seen, the lower the Ά T, the greater the rate. Conversely, customers that minimize their flow rate per ton cooling are rewarded. (Moe 2005) Risks and Uncertainties Faced By District Cooling Customers There is no bargaining power with the District Cooling Services Provider once a building is connected to District Cooling Scheme and Uncertainties over future tariffs. Risks and Uncertainties Faced By District Cooling Investors Demand is unpredictable, Uncertainty in dealing with building owners on District Cooling Supply Agreement (negotiations can be time consuming), Unpredictability relating to land costs for District Cooling plant room and distribution pipelines and High initial capital investments with long payback periods. (Parsons 2003) Strategic Environmental Assessment Noise The central chiller plant and pumps of the district cooling scheme are housed in underground plant rooms, this reduces the noise. As buildings connecting to District Cooling Scheme do not need to have their own chiller plant, the district cooling user building will have no noise. Appropriate techniques can be implemented to reduce the noise during construction stage of district cooling scheme. (Parsons 2003) Air Quality District cooling reduces electricity energy thus minimising carbon dioxide emission and will help improve air quality. Based on the case study for 4800 hours of operation the energy saving by using district cooling would be (1.91 -1.12)kw/ton x 4800 hrs x 18000 tons i.e. 68,256,000 KWh , which is equivalent to 104,772,960 lbs of CO2 (Electricity carbon emission factor 1.535 lbs CO2/KWh).(EPA 2006) Benefits of district cooling for project owners: A highly efficient solution: Given that this region has extreme heat, air conditioning can account for as much as 70% of the energy consumption in a typical building. Moving this load from individual houses to a central plant, the housing electric load is reduced considerably and along with it the number of electric substations and length and sizes of electric cables. District cooling requires far less electric power than multiple plant rooms or ducted splits. Also the plant room can house the electric substation, enormously reducing the electric works. Significant capital and O M cost reduction: Removing in-building or on-premise chiller plants by using district cooling schemes; means that availability of free land for other use. Also project owners do not need to buy more land to operate and maintain complex central air conditioning plants. They also need not have to replace expensive equipment. The industry has a two part tariff structure which is complex to understand. It is based on an Annual Capacity or Connection Charge for every ton committed to a property and also a Consumption Charge for the energy used measured through an energy meter installed for every end user. Palm district cooling has developed a new form of tariff structure that maintains the consumption charge but replaces the annual capacity charge or connection charge with a One Time Service Connection Charge (AED/sq ft) of the property. (Prashant 2007) Benefits of this tariff structure: Developer need not pay advance cost for DC, Developer does not need to pay for any air-conditioning chiller units during construction stage. The tenant or property owner contributes to the cost of the DC system at the time of purchasing his property [as he would do with conventional AC equipment]. When district cooling is an option, the building owner can invest capital towards amenities for tenants. Reduced project complexity means faster project completion: Dedicated experienced professionals take over the complex task of providing the cooling needs of the project, simplifying and expediting the project development cycle and expediting move-in dates and income generation Improved ROI numbers: Reduced initial up-front capital outlays for developers, faster move-in dates, reduced OM costs and the elimination of costs related to technical staff all translate into less financial risk for project owners, with improved return on investment and better project economies overall for developers and owners. No idle expensive capacity: District Cooling Solutions allow project owners to buy the capacity they need when they need it. Improved reliability and ease of operation: Economies of scale allow for sophisticated redundant systems resulting in superior 100% up-time performance and ease of operation for project owners. Units used are high-tech and industrial which dramatically decreases the failure frequency compared to commercial equipment. District cooling reliability is in excess of 99.94%. (Source: IDEA). (Papadopoulos et al 2006) The central chiller plant concept, almost by definition, is more flexible and more reliable and possesses a greater degree of redundancy than the concept involving individual cooling packages. Greater flexibility in design: Architects have more creative leeway due to the elimination of heavy machinery. Ecologically friendly: It provides for a noise free, clean environment for the tenants. The absence of tall towers allows for a clean environment.

Currency Risk Management Essay

Currency or Exchange rate risk management is an integral part in every firm’s decisions about foreign currency exposure. Currency risk hedging strategies entail eliminating or reducing this risk, and require understanding of both the ways that the exchange rate risk could affect the operations of economic agents and techniques to deal with the consequent risk implications. Selecting the appropriate hedging strategy is often a daunting task due to the complexities involved in measuring accurately current risk exposure and deciding on the appropriate degree of risk exposure that ought to be covered. The need for currency risk management started to arise after the break down of the Bretton Woods system and the end of the U.S. dollar peg to gold in 1973. The issue of currency risk management for non-financial firms is independent from their core Business and is usually dealt by their corporate treasuries. Most multinational firms have also risk committees to oversee the treasury’s strategy in managing the exchange rate (and interest Rate) risk. This shows the importance that firms put on risk management issues and techniques. Conversely, international investors usually, but not always, manage their exchange rate risk independently from the underlying assets and/or liabilities. Since their currency exposure is related to translation risks on assets and liabilities denominated in foreign currencies, they tend to consider currencies as a separate asset class requiring a Currency overlay mandate. It can be argued that prudent management of multinational firms requires currency risk hedging for their foreign transaction, translation and economic operations to avoid potentially adverse currency effects on their profitability and market valuation. DEFINITION AND TYPES OF CURRENCY RISK A common definition of currency risk relates to the effect of unexpected exchange rate changes on the value of the firm. In particular, it is defined as the possible direct loss (as a result of an unhedged exposure) or indirect loss in the firm’s cash flows, assets and liabilities, net profit and, in turn, its stock market value from an exchange rate move. To manage the exchange rate risk inherent in multinational firms’ operations, a firm needs to determine the specific type of current risk exposure, the hedging strategy and the available instruments to deal with these currency risks. Multinational firms are participants in currency markets by virtue of their international operations. To measure the impact of exchange rate movements on a firm that is engaged in foreign-currency denominated transactions, i.e., the implied value-at-risk (VAR) from exchange rate moves, we need to identify the type of risks that the firm is exposed to and the amount of risk encountered. The four main types of currency / exchange rate risk that exist: 1. Translation risk: A firm’s translation exposure is the extent to which its financial reporting is affected by exchange rate movements. As all firms generally must prepare consolidated financial statements for reporting purposes, the consolidation process for multinationals entails translating foreign assets and liabilities or the financial statements of foreign subsidiaries from foreign to domestic currency. While translation exposure may not affect a firm’s cash flows, it could have a significant impact on a firm’s reported earnings and therefore its stock price. Translation exposure is distinguished from transaction risk as a result of income and losses from various types of risk having different accounting treatments. Translation gives special consideration to assets and liabilities with regards to foreign exchange risk, whereas exposures to revenues and expenses can often be managed ex ante by managing transactional exposures when cash flows take place; 2. Transaction risk: A firm has transaction exposure whenever it has contractual cash flows (receivables and payables) whose values are subject to unanticipated changes in exchange rates due to a contract being denominated in a foreign currency. To realize the domestic value of its foreign-denominated cash flows, the firm must exchange foreign currency for domestic currency. As firms negotiate contracts with set prices and delivery dates in the face of a volatile foreign exchange market with exchange rates constantly fluctuating, the firms face a risk of changes in the exchange rate between the foreign and domestic currency. Firms generally become exposed as a direct result of activities such as importing and exporting or borrowing and investing. Exchange rates may move by up to 10% within any single year, which can significantly affect a firm’s cash flows, meaning a 10% decline in the value of a receivable or a 10% rise in the value of a payable. Such outcomes could be troubl esome as export profits could be negated entirely or import costs could rise substantially; 3. Economic Risk: A firm has economic exposure (also known as operating exposure) to the degree that its market value is influenced by unexpected exchange rate fluctuations. Such exchange rate adjustments can severely affect the firm’s position with regards to its competitors, the firm’s future cash flows, and ultimately the firm’s value. Economic exposure can affect the present value of future cash flows. Any transaction that exposes the firm to foreign exchange risk also exposes the firm economically, but economic exposure can be caused by other business activities and investments which may not be mere international transactions, such as future cash flows from fixed assets. A shift in exchange rates that influences the demand for a good in some country would also be an economic exposure for a firm that sells that good; and 4. Contingent Risk: A firm has contingent exposure when bidding for foreign projects or negotiating other contracts or foreign direct investments. Such an exposure arises from the potential for a firm to suddenly face a transactional or economic foreign exchange risk, contingent on the outcome of some contract or negotiation. For example, a firm could be waiting for a project bid to be accepted by a foreign business or government that if accepted would result in an immediate receivable. While waiting, the firm faces a contingent exposure from the uncertainty as to whether or not that receivable will happen. If the bid is accepted and a receivable is paid the firm then faces a transaction exposure, so a firm may prefer to manage contingent exposures. MEASUREMENT OF EXCHANGE RATE RISK After defining the types of exchange rate risk that a firm is exposed to, a crucial aspect in a firm’s exchange rate risk management decisions is the measurement of these risks.   Measuring currency risk may prove difficult, at least with regards to translation and economic risk. At present, a widely used method is the value-at-risk (VAR) model. Broadly, value at risk is defined as the maximum loss for a given exposure over a given time horizon with z% confidence. The VAR methodology can be used to measure a variety of types of risk, helping firms in their risk management. However, the VAR does not define what happens to the exposure for the (100 – z) % point of confidence, i.e., the worst case scenario. Since the VAR model does not define the maximum loss with 100 percent confidence, firms often set operational limits, such as nominal amounts or stop loss orders, in addition to VAR limits, to reach the highest possible coverage. VALUE-AT-RISK CALCULATION The VAR measure of exchange rate risk is used by firms to estimate the riskiness of a foreign exchange position resulting from a firm’s activities, including the foreign exchange position of its treasury, over a certain time period under normal conditions. The VAR calculation depends on 3 parameters: †¢ The holding period, i.e., the length of time over which the foreign exchange position is planned to be held. The typical holding period is 1 day. †¢ The confidence level at which the estimate is planned to be made. The usual confidence levels are 99 percent and 95 percent. †¢ The unit of currency to be used for the denomination of the VAR. Assuming a holding period of x days and a confidence level of y%, the VAR measures what will be the maximum loss (i.e., the decrease in the market value of a foreign exchange position) over x days, if the x-days period is not one of the (100-y)% x-days periods that are the worst under normal conditions. Thus, if the foreign exchange position has a 1-day VAR of $10 million at the 99 percent confidence level, the firm should expect that, with a probability of 99 percent, the value of this position will decrease by no more than $10 million during 1 day, provided that usual conditions will prevail over that 1 day. In other words, the firm should expect that the value of its foreign exchange rate position will decrease by no more than $10 million on 99 out of 100 usual trading days or by more than $10 million on 1 out of every 100 usual trading days. To calculate the VAR, there exists a variety of models. Among them, the more widely-used are: (1) the historical simulation, which assumes that currency returns on a firm’s foreign exchange position will have the same distribution as they had in the past; (2) the variance- covariance model, which assumes that currency returns on a firm’s total foreign exchange position are always (jointly) normally distributed and that the change in the value of the foreign exchange position is linearly dependent on all currency returns; and (3) Monte Carlo simulation which assumes that future currency returns will be randomly distributed. The historical simulation is the simplest method of calculation. This involves running the firm’s current foreign exchange position across a set of historical exchange rate changes to yield a distribution of losses in the value of the foreign exchange position, say 1,000, and then computing a percentile (the VAR). Thus, assuming a 99 percent confidence level and a 1-day holding period, the VAR could be computed by sorting in ascending order the 1,000 daily losses and taking the 11th largest loss out of the 1,000 (since the confidence level implies that 1 percent of losses – 10 losses –should exceed the VAR). The main benefit of this method is that it does not assume a normal distribution of currency returns, as it is well documented that these returns are not normal but rather leptokurtic. Its shortcomings, however, are that this calculation requires a large database and is computationally intensive. The variance – covariance model assumes that: (1) the change in the value of a firm’s total foreign exchange position is a linear combination of all the changes in the values of individual foreign exchange positions, so that also the total currency return is linearly dependent on all individual currency returns; and (2) the currency returns are jointly normally distributed. Thus, for a 99 percent confidence level, the VAR can be calculated as: VAR= -Vp (Mp + 2.33 Sp) Where, Vp is the initial value (in currency units) of the foreign exchange position Mp is the mean of the currency return on the firm’s total foreign exchange position, which is a weighted average of individual foreign exchange positions Sp is the standard deviation of the currency return on the firm’s total foreign exchange position, which is the standard deviation of the weighted transformation of the variance-covariance matrix of individual foreign exchange positions While the variance-covariance model allows for a quick calculation, its drawback includes the restrictive assumptions of a normal distribution of currency returns and a linear combination of the total foreign exchange position. Note, however, that the normality assumption could be relaxed. When a non-normal distribution is used instead, the computational cost would be higher due to the additional estimation of the confidence interval for the loss exceeding the VAR. Monte Carlo simulation usually involves principal components analysis of the variance-covariance model, followed by random simulation of the components. While it’s main advantages include its ability to handle any underlying distribution and to more accurately assess the VAR when non-linear currency factors are present in the foreign exchange position (e.g., options), its serious drawback is the computationally intensive process. MANAGEMENT OF CURRENCY RISK After identifying the types of exchange rate risk and measuring the associated risk exposure, a firm needs to decide whether to hedge or not these risks. In international finance, the issue of the appropriate strategy to manage (hedge) the different types of exchange rate risk has yet to be settled. In practice, however, corporate treasurers have used various currency risk management strategies depending, ceteris paribus, on the prevalence of a certain type of risk and the size of the firm. A. Hedging Strategies Indicatively, transaction risk is often hedged tactically (selectively) or strategically to preserve cash flows and earnings, depending on the firm’s treasury view on the future movements of the currencies involved. Tactical hedging is used by most firms to hedge their transaction currency risk relating to short-term receivable and payable transactions, while strategic hedging is used for longer-period transactions. However, some firms decide to use passive hedging, which involves the maintenance of the same hedging structure and execution over regular hedging periods, irrespective of currency expectations—that is, it does not require that a firm takes a currency view. Translation, or balance sheet, risk is hedged very infrequently and non-systematically, often to avoid the impact of possible abrupt currency shocks on net assets. This risk involves mainly long-term foreign exposures, such as the firm’s valuation of subsidiaries, its debt structure and international investments. However, the long-term nature of these items and the fact that currency translation affects the balance sheet rather than the income statement of a firm, make hedging of the translation risk less of a priority for management. For the translation of currency risk of a subsidiary’s value, it is standard practice to hedge the net balance sheet exposures, i.e., the net assets (gross assets less liabilities) of the subsidiary that might be affected by an adverse exchange rate move. Within the framework of hedging the exchange rate risk in a consolidated balance sheet, the issue of hedging a firm’s debt profile is also of paramount importance. The currency and maturity composition of a firm’s debt determines the susceptibility of its net equity and earnings to exchange rate changes. To reduce the impact of exchange rates on the volatility of earnings, the firm may use an optimization model to devise an optimal set of hedging strategies to manage its currency risk. Hedging the remaining currency exposure after the optimization of the debt composition is a difficult task. A firm may use tactical hedging, in addition to optimization, to reduce the residual currency risk. Moreover, if exchange rates do not move in the anticipated direction, translation risk hedging may cause either cash flow or earnings volatility. Therefore, hedging translation risk often involves careful weighing the costs of hedging against the potential cost of not hedging. Economic risk is often hedged as a residual risk. Economic risk is difficult to quantify, as it reflects the potential impact of exchange rate moves on the present value of future cash flows. This may require measuring the potential impact of an exchange rate deviation from the benchmark rate used to forecast a firm’s revenue and cost streams over a given period. In this case, the impact on each flow may be netted out over product lines and across markets, with the net economic risk becoming small for firms that invest in many foreign markets because of offsetting effects. Also, if exchange rate changes follow inflation differentials (through PPP) and a firm has a subsidiary that faces cost inflation above the general inflation rate, the firm could find its competitiveness eroding and its original value deteriorating as a result of exchange rate adjustments that are not in line with PPP. Under these circumstances, the firm could best hedge its economic exposure by creating payables (e.g., financing operations) in the currency that the firm’s subsidiary experiences the higher cost inflation (i.e., in the currency that the firm’s value is vulnerable). Sophisticated corporate treasuries, however, are developing efficient frontiers of hedging strategies as a more integrated approach to hedge currency risk than buying a plain vanilla hedge to cover certain foreign exchange exposure. In effect, an efficient frontier measures the cost of the hedge against the degree of risk hedged. Thus, an efficient frontier determines the most efficient hedging strategy as that which is the cheapest for the most risk hedged. Given a currency view and exposure, hedging optimization models usually compare 100 percent unhedged strategies with 100 percent hedged using vanilla forwards and option strategies in order to find the optimal one. Although this approach to managing risk provides the least-cost hedging structure for a given risk profile, it critically depends on the corporate treasurer’s view of the exchange rate. Note that such optimization can be used for transaction, translation or economic currency risk, provided that the firm has a specific currency view (i.e., a possible exchange rate forecast over a specified time period). B. Hedging Benchmarks and Performance Hedging performance can be measured as a distance to a given benchmark rate. The risk embedded in the hedge is usually expressed as a VAR number that will be consistent with the performance measure. Hedging optimization models, as methods for optimizing hedging strategies for currency-denominated cash flows, help find the most efficient hedge for individual currency exposures, while most of them do not provide a hedging process for multiple currency hedging. Thus, both performance and VAR are measured as effective hedge rates, calculated for each hedging instrument used and the risk in terms of a confidence level. A single optimal hedging strategy is then selected by defining the risk that a firm is willing to take. This strategy is the lowest possible effective hedge rate for an acceptable level of uncertainty. In this way, when the firm’s currency view entails a perception of volatility, options generate a better or similar effective hedge rate at lower uncertainty than the unhedged position. Furthermore, when local currency has a relatively high yield and low volatility, options will almost always generate a better effective hedging rate than forward hedging. As part of the currency risk management policy, firms use a variety of hedging benchmarks to manage their hedging strategies effectively. Such benchmarks could be the hedging level (i.e., a certain percent), the reporting period especially for firms that use forward hedging to limit the volatility of their net equity (e.g., quarterly or 12-month benchmarks) and budget exchange rates, depending on the prevailing accounting rules. Moreover, benchmarks enable the performance of individual hedges to be measured against that of the firm. C. Hedging and Budget Rates Budget exchange rates provide firms with a reference exchange rate level. Setting budget exchange rates is often linked to the firm’s sensitivities and benchmarking priorities. After deciding on the budget rate, the corporate treasury will have to secure an appropriate hedge rate and ensure that there is minimal deviation from that hedge rate. This process will determine the frequency and instruments to be used in hedging. It should be further pointed out that persistent moves relative to the numeracies (functional) currency should be reflected in the budget rates, or strategic positioning and hedging should be considered. Firms have different practices in setting budget exchange rates. Many corporate treasurers of multinational firms prefer to use PPP rates as budget exchange rates, often with the understanding that tactical hedging may be needed over the short-term where the forecasting performance of the PPP model is usually poor.2 However, other multinational firms prefer to set the budget rate in accordance with their sales calendar and, in turn, with their hedging strategy. For example, if a firm has a quarterly sales calendar, it may decide to hedge its next year’s quarterly foreign currency cash flow in such a way that they do not differ by more than a certain percentage from the cash flow in the same quarter of last year. Accordingly, this will necessitate four hedges per year, each of one-year tenor, with hedging being done at the end of the period, using the end-of-period exchange rate as its budget rate. Alternatively, a firm may decide to set its budget exchange rate at the daily average exchange rate over the previous fiscal year. In such case, the firm would need to use one hedge through, perhaps, an average-based instrument like an option or a synthetic forward. This hedging operation will usually be executed on the last day of the previous fiscal year, with starting day the first day of the new fiscal year. Furthermore, a firm may also use passive currency hedging, such as hedging the average value of a foreign currency cash flow over a specified time period, relative to a previous period, through option structures available in the market. This type of hedging strategy is fairly simple and easier to monitor. The relative version of the PPP theory states that bilateral exchange rates would adju st to the relative price differentials of the same good traded in the two countries. Setting budget exchange rates is also crucial for a firm’s pricing strategy, in addition to their importance for defining the benchmark hedging performance and tenor of a hedge (as the latter generally match cash flow hedging requirements). However, the budget exchange rate used to forecast cash flows needs to be close to the spot exchange rate in order to avoid possible major changes in the firm’s pricing strategy or to reconsider its hedging strategy. In this connection, it should be noted that forecasting future exchange rates is a key aspect of a firm’s pricing strategy. Since it has been well-documented that forward rates are poor predictors of future spot rates, structural or time-series exchange rate models need to be employed for such an endeavour. This becomes evident if we compare a firm’s net cash flows estimated by using the forecast rate and the future spot exchange rate. For an investment in a foreign subsidiary, moreover, the budget exchange rate is often the accounting rate, i.e., the exchange rate at the end of the previous fiscal year. D. Best Practices for Exchange Rate Risk Management For their currency risk management decisions, firms with significant exchange rate exposure often need to establish an operational framework of best practices. These practices or principles may include: 1. Identification of the types of exchange rate risk that a firm is exposed to and measurement of the associated risk exposure. As mentioned before, this involves determination of the transaction, translation and economic risks, along with specific reference to the currencies that are related to each type of currency risk. In addition, measuring these currency risks—using various models (e.g. VAR)—is another critical element in identifying hedging positions. 2. Development of an exchange rate risk management strategy. After identifying the types of currency risk and measuring the firm’s risk exposure, a currency strategy needs to be established on how to deal with these risks. In particular, this strategy should specify the firm’s currency hedging objectives—whether and why the firm should fully or partially hedge its currency exposures. Furthermore, a detailed currency hedging approach should be established. It is imperative that a firm details the overall currency risk management strategy on the operational level, including the execution process of currency hedging, the hedging instruments to be used, and the monitoring procedures of currency hedges. 3. Creation of a centralized entity in the firm’s treasury to deal with the practical aspects of the execution of exchange rate hedging. This entity will be responsible for exchange rate forecasting, the hedging approach mechanisms, the accounting procedures regarding currency risk, costs of currency hedging, and the establishment of benchmarks for measuring the performance of currency hedging. (These operations may be undertaken by a specialized team headed by the treasurer or, for large multinational firms, by a chief dealer.) 4. Development of a set of controls to monitor a firm’s exchange rate risk and ensure appropriate position taking. This includes setting position limits for each hedging instrument, position monitoring through mark-to-market valuations of all currency positions on a daily basis (or intraday), and the establishment of currency hedging benchmarks for periodic monitoring of hedging performance (usually monthly). 5. Establishment of a risk oversight committee. This committee would in particular approve limits on position taking, examine the appropriateness of hedging instruments and associated VAR positions, and review the risk management policy on a regular basis. Managing exchange rate risk exposure has gained prominence in the last decade, as a result of the unusual occurrence of a large number of currency crises. From the corporate managers’ perspective, currency risk management is increasingly viewed as a prudent approach to reducing a firm’s vulnerabilities from major exchange rate movements. This attitude has also been reinforced by recent international attention on both accounting and balance sheet risks. HEDGING INSTRUMENTS FOR MANAGING EXCHANGE RATE RISK Within the framework of a currency risk management strategy, the hedging instruments allowed to manage currency risk should be specified. The available hedging instruments are enormous, both in variety and complexity, and have followed the dramatic increase in the specific hedging needs of the modern firm. These instruments include both OTC and exchange-traded products. Among the most common OTC currency hedging instruments are currency forwards and cross-currency swaps. Currency forwards are defined as buying a currency contract for future delivery at a price set today. Two types of forwards contracts are often used: outright forwards (involving the physical delivery of currencies) and non-deliverable forwards (which are settled on a net cash basis). With forwards, the firm is fully hedged. However, the high cost of forward contracts and the risk of the exchange rate moving in the opposite direction are serious disadvantages. The two most commonly used cross-currency swaps are the cross-currency coupon swap and the cross-currency basis swaps. The cross-currency coupon swap is defined as buying a currency swap and at the same time pay fixed and receives floating interest payments. Its advantage is that it allows firms to manage their foreign exchange rate and interest rate risks, as they wish, but it leaves the firm that buys this instrument vulnerable to both currency and interest rate risk. Cross-currency basis swap is defined as buying a currency swap and at the same time pay floating interest in a currency and receive floating in another currency. This instrument, while assuming the same currency risk as the standard currency swap, has the advantage that it allows a firm to capture prevailing interest rate differentials. However, the major disadvantage is that the primary risk for the firm is interest rate risk rather that currency risk. For exchange-traded currency hedging instruments, the main types are currency options and currency futures. The development of various structures of currency options has been very rapid, and is attributed to their flexible nature. The most common type of option structure is the plain vanilla call, which is defined as buying an upside strike in an exchange rate with no obligation to exercise. Its advantages include its simplicity, lower cost than the forward, and the predicted maximum loss—which is the premium. However, its cost is higher than other sophisticated options structures such as call spreads (buy an at-the-money call and sell a low delta call). Currency futures are exchange-traded contracts specifying a standard volume of a particular currency to be exchanged on a specific settlement date. They are similar to forward contracts in that they allow a firm to fix the price to be paid for a given currency at a future point in time. Yet, their characteristics differ from forward rates, both in terms of the available traded currencies and the typical (quarterly) settlement dates. However, the price of currency futures will normally be similar to the forward rates for a given currency and settlement date. Comparing currency forward and currency futures markets, the size of the contract and the delivery date are tailored to individual needs in the forward market (i.e., determined between a firm and a bank), as opposed to currency futures contracts that are standardized and guaranteed by some organized exchange. While there is no separate clearing-house function for forward markets, all clearing operations for futures markets are handled by an exchange clearing house, with daily mark-to-market settlements. In terms of liquidation, while most forward contracts are settled by actual delivery and only some by offset—at a cost, in contrast, most futures contracts are settled by offset and only very few by delivery. Furthermore, the price of a futures contract changes over time to reflect the market’s anticipation of the future spot rate. If a firm holding a currency futures contract decides before the settlement date that it no longer wants to maintain such a position, it can close out its position by selling an identical futures contract. This, however, cannot be done with forward contracts. Finally, since currency hedging is often costly, a firm may first consider â€Å"natural† hedging, such as (1) matching, which involves pairing suitably a multinational firm’s foreign currency inflows and outflows with respect to amount and timing; (2) netting, which involves the consolidated settlement of receivables, payables and debt among the subsidiaries of a firm; and (3) invoicing in a foreign currency, which reduces transaction risk related primarily to exports and imports. HEDGING PRACTICES BY U.S. FIRMS According to the BIS (see Tables 1-4) and the International Swap and Derivatives Association, the OTC derivatives market has experienced an exponential growth. Even with the recent slowdown due to the special disclosure requirements of FAS 133, derivatives continue to be the main hedging instrument for most firms. However, the increased availability of derivative instruments, coupled with the advent of mark-to-market hedge accounting (FAS 133 and IAS 39), implies a difficult to follow impact of derivatives on firms’ financial statements. Several surveys have shown certain characteristics and practices of U.S. non-financial firms using derivatives. Thus, the larger the size of sales of U.S. non-financial firms, the more likely is to use derivatives in their risk management. Foreign currency derivatives usage is most common, with almost three-fourths of the reporting firms taking positions. The primary goal of exchange risk hedging is the minimization of the variability in cash flow and in accounting earnings, arising from the firms’ operational activities and characteristics. Preoccupation with accounting earnings may be related to their role in analysts’ perceptions and predictions of future earnings and in management compensation. Furthermore, it is interesting to note that U.S. firms do not place high importance in minimizing the variation in the market value of the firm (the present discounted value of the stream of future cash flows) when they use derivatives in risk management. The choice of derivative instruments for foreign exchange management by U.S. firms is concentrated in simple instruments, with OTC currency forwards being by far the most popular instrument (over 50 percent of all foreign exchange derivatives instruments), OTC currency options being the second most preferred hedging instrument (around 20 percent of all foreign exchange derivative instruments) and OTC swaps being the third (around 10percent). Forward-type (volatility elimination) instruments are used to hedge foreign exchange exposures arising from U.S. firms’ contractual commitments (accounts receivable/payable, and repatriations), as recommended by the international financial literature. Option-type instruments, on the other hand, are used to hedge uncertain foreign currency-denominated future cash flows (usually, related to anticipated transactions beyond one year and to cover economic exposures). The tendency of US firms to use OTC currency forwards rather than OTC options or swaps should mainly be attributed to the relatively higher liquidity and depth of forward markets. The use of OTC instruments (forwards/swaps and options) dominates that of exchange traded hedging instruments, with currency futures being preferred by less than 10 percent of U.S. firms and currency options being preferred by a very small percentage of firms. The prevalence of OTC instruments should be attributed to firms’ very specific hedging needs that can primarily be accommodated in the more-flexible OTC market. The majority of U.S. firms with a set frequency for revaluing derivatives do so on a monthly basis, with a quarter of the total firms valuing their derivatives at least weekly and a very small percentage doing so only on an annual basis. Finally, the most common methods to evaluate the riskiness of their foreign exchange positions are stress testing of derivatives and VAR techniques. CONCLUSION Measuring and managing currency risk exposure are important functions in reducing a firm’s vulnerabilities from major exchange rate movements. These vulnerabilities mainly arise from a firm’s involvement in international operations and investments, where exchange rate changes could affect profit margins, through their effect on sources for inputs, markets for outputs and debt, and the value of assets. Prudent management of currency risk has been increasingly mandated by corporate boards, especially after the currency-crisis episodes of the last decade and the consequent heightened international attention on accounting and balance sheet risks. In managing currency risk, multinational firms utilize different hedging strategies depending on the specific type of currency risk. These strategies have become increasingly complicated as they try to address simultaneously transaction, translation and economic risks. As these risks could be detrimental to the profitability and the market valuation of a firm, corporate treasurers, even of smaller-size firms have become increasingly proactive in controlling these risks. Thereby, a greater demand for hedging protection against these risks has emerged and, in response, a greater variety of instruments has been generated by the ingenuity of the financial engineering industry. This paper presents some of the main issues in the measurement and management of exchange rate risks faced by firms, with special attention to the traditional types of exchange rate risk (transaction, translation, and economic), the currently predominant methodology in measuring exchange rate risk (VAR), and the advantages and disadvantages of various exchange rate risk management approaches (tactical vs. strategical, and passive vs. active). It also outlines a set of widely-accepted best practices in currency risk management, and reviews the use of some of the widely-used hedging instruments in the OTC and exchange traded markets. It also reports on the use of various derivatives instruments and hedging practices of U.S. multinationals. Based on the reported U.S. data, it is interesting to note that the larger the size of a firm the more likely it is to use derivative instruments in hedging its exchange rate risk exposure; the primary goal of U.S. firms’ exchange rate risk hedging operations is to minimize the variability in their cash flow and earning accounts (mainly related to payables, receivables and repatriations); and the choice of foreign exchange derivatives instruments is concentrated in OTC currency forwards (over 50 percent of all foreign exchange derivatives used), OTC currency options (around 20 percent) and OTC currency swaps (around 10 percent). From the available exchange-traded foreign exchange hedging instruments, currency futures is preferred by less than 10 percent of U.S. firms and currency options by around 2 percent. Overall, it should be noted that the data on U.S. firms are only representative of the reporting period that they refer to and are indicative of the level of sophistication of U.S. corporate treasurers and the level of development of local derivatives markets. By no means can these stylized facts be generalized for other time periods and countries, especially those with different corporate structures and capital market development. To form a better understanding of global firms’ practices in this area, more empirical studies would need to be undertaken to explore their exchange rate risk measurement and hedging behaviours.

Dead Man Walking: How the Death Penalty is totally Biased

My position on the death penalty is that it is completely unfair and an unjust system. Throughout the whole novel we learn how the death penalty was strictly enforced more in the south than in any other part of the nation. The worst part of this was that it was most rigorously used against people who killed â€Å"white† people. The death penalty was a system that was racial and also socioeconomic biased, making it totally unfair and one-sided. In a state that had the highest misery stats in the nation, it was pretty expensive to afford a well-prepared lawyer. By not having a well-prepared lawyer you had to rely on public defenders which usually had many clients to defend that made it impossible to interview inmates before trials, much less do time-consuming investigations that capital cases required; thus the reason why ninety-nine percent of death-row inmates were poor. The government had basically created two types of separate, unjust legal systems: one for the rich, in which everything was put into consideration, every opinion was heard, and where you could buy your freedom; and one for the rich, in which hasty guilty pleas and brief hearings are the rule and appeals are the exceptions. Read this â€Å"The Secrets of Haiti’s Living Dead† Racism was a very big part of this penal system. As both Prejean and Farmer pointed out in the novel, the death penalty biased people who committed murders against white people and that in the south nine times out of ten when the death penalty is sought it’s because the victim is â€Å"white†. Around seventy-five percent of death-row inmates were there for killing â€Å"whites†. Even the Supreme Court acknowledged, in McCleskey vs. Kemp (1987), that there exists racial bias in capital sentencing and that killers of â€Å"whites† are more likely to receive the death penalty than killers of â€Å"blacks†. These are the type of things that made this system prejudice towards â€Å"blacks†, not only that but it also demoralized their life. Throughout the novel Prejean strives to do the opposite of what society is doing to these men, which is humanize them. The humanization of both Willie and Sonnier actually made my stance against the death penalty a lot stronger. It just shows that not everyone is perfect and no matter how big or small everyone will have flaws. I do agree with punishment but it doesn’t give the government the right to choose whether you live or die.

Not Without My Daughter and Persepolis - Free Essay Example

Sample details Pages: 5 Words: 1527 Downloads: 8 Date added: 2019/07/03 Category Literature Essay Level High school Tags: Persepolis Essay Did you like this example? The historical backdrop for the two films ‘Not Without My Daughter’ and ‘Persepolis’ involved tensions preceding and during the Iranian Revolution in the 1970s. Reza Shah Pahlavi held power in Iran leading up to the revolutions, and was known for being pro-Axis during World War II. Due to this, Reza Shah was deposed during the Anglo-Russian occupation after the war in favor of his son, Shah Mohammad Reza Pahlavi. Don’t waste time! Our writers will create an original "Not Without My Daughter and Persepolis" essay for you Create order The Prime Minister of Iran at the time, Mossadegh fought to nationalize the Iranian oil industry (the Anglo-Iranian Oil Company, owned by the British), which then allowed the British to continue to hold power in Iran. Britain then issued an embargo and and blockade that stopped Iranian oil exports and resulted in a significant blow to the Iranian economy. Because of this, a power struggle between the Shah and Mossadegh ensued, and the Shah fled the country. A coup engineered by British and American intelligence overthrew Mossadegh and the Shah returned from exile. With his return, the Shah began to enforce what was called the White Revolution in 1963, a series of changes meant to radically Westernize Iran, which included social and economic modernization. This was met with great opposition by the public, but the Shah was able to continue to enforce his policies and control dissidents with the creation of his secret police, the SAVAK. Islamic fundamentalist Ayatollah Khomeini is force d into exile. Mass demonstrations, protests, riots, and strikes occured because of the Shah’s authoritarian rule. In 1979, the Shah and his family were forced into exile, but the US welcomed the Shah for medical treatment of his cancer. All these events led to the Iranian Hostage Crisis, where 52 American citizens were taken hostage for 444 days. In 1979, Ayatollah Khomeini returns from exile and was able to serve as supreme leader from 1979 to 1989 due to his ideas formulated during exile being smuggled into Iran during the Shah’s rule, enforcing policies opposing the Shah’s and working to cut ties with the West. His policies included immediately executing many members of the Shah’s government, making it a requirement for women to wear the veil, and banning Western music and alcohol. 2nd section The film ‘Not Without My Daughter’ was based on the book by the same name by Betty Mahmoody, a woman who was taken to Iran with her daughter by her husband and was forced to stay, unable to escape. It contains many inaccuracies due to the fact that there were many Islamophobic liberties taken with one woman’s unfortunate story. The entire movie portrayed this woman as being caught in the frightening clutches of Islam, trapped in a foreign country, with her abusive Iranian husband. It was a major misrepresentation of an entire culture and ethnicity. Throughout the movie, the Iranian people as well as the religion of Islam are portrayed in a negative light, showing how ‘extreme and frightening’ the cultural differences were. There was so much hate coming from Betty’s husband’s family, as well as everyone else she seemed to encounter, towards Americans that was overly exaggerated. After becoming familiar with how Iranians live, such as dini ng cross-legged, Betty often described the Iranian culture as being ‘primitive’. There are a few scenes showing Betty’s husband, Moody, violently beating her, something he never did while they lived in the United States. It was as soon as he got to Iran and began re-dedicating himself to Islam that he became the villain. The only Iranians that were portrayed in a positive light were the ones that assisted Betty and her daughter in their attempt to escape, but the creators of the film emphasized that fact that those people were more exposed to Western ideals. 3rd section ‘Persepolis’, an animated film, focuses on a young girl growing up during the time where the Ayatollah Khomeini comes into power. It is a basic comparison between the evil Iranian government, and the sweet humble family of Marjane Satrapi. Everyone who seemed like an enemy to Marjane was portrayed in the movie as being a dark, scary figure without human-like features. Just like in ‘Not Without My Daughter’, the issues in Iran were very black and white in the films. There was no difference between Iranian people and the Iranian government’s agenda. One of the most exaggerated, inaccurate parts of the film was how immediately something happened that wouldn’t be seen favorably by the Iranian government, there would immediately be a horde of angry policeman on the scene. In real life, things don’t happen that quickly. 4th section Both films were based off one person’s experience, so neither shows the viewer the whole story. The book ‘Not Without My Daughter’ was written closely after a lot of the major events in Iran were happening, so there was a lot of tension that was expressed in the film’s extra exaggerations as well as obvious islamophobia in the media response to the book and its film. In my opinion, ‘Not Without My Daughter’ is more detrimental to the viewer because it is more distinct and clear with its portrayals opposing Islamic culture. Many people only got their information on Iran from this movie and it’s the reason why so many people remained biased without getting the truth about all sides of the events. However, ‘Persepolis’ is also quite detrimental to the story that the viewer is getting because it tells the story of a young Iranian girl who is also negatively impacted by the Iranian regime, with bias against non-Western Iranians. 5th section ‘Not Without My Daughter’ is accurate in the sense that Betty’s story did happen to many women with Iranian husbands. These American women were essentially powerless in the Iranian society under the Khomeini’s regime so it was often difficult for them to leave against their husband’s wishes. One scene in the film when the Mahmoodys first arrive in Iran, they are instructed to step over a freshly killed lamb. Although this contributed to Betty’s fear and misjudgement, and was probably frightening for her young daughter, this is in fact a sign of respect and welcoming for the Iranian culture. The film was also accurate at the beginning in the American hospital, where Moody often faced prejudice at work due to the Iran-American tensions following the hostage crisis. 6th section ‘Persepolis’ was accurate in showing the civil unrest while Marjane was Iran, with many depictions of bombings and people close to her dying. Also, the Westernization of her family and others around them was evident along with how dangerous it became once the Ayatollah came into power to express their Western attributes. Marjane and her cohorts tried to keep their ‘cool’ exterior even with the risk of being punished by the government, something that many Iranian teens did at that time. There was one scene where Marjane was walking down the street past men who were secretly selling cassette tapes of Western artists such as Led Zeppelin, Michael Jackson, Iron Maiden, and Pink Floyd, and I thought this was interesting and it did show how many people opposed the Ayatollah’s leadership. 7th section ‘Not Without My Daughter’ was originally written by Betty Mahmoody to document her time in Iran and the journey it took for her escape, and the film was then created for economic and political benefit. At the time of its creation there was clear tensions and bias against Iran, and the film just contributed to that even more. This movie, in the period following its release, gave the viewers an excuse to be prejudiced against Iran. Its use in the classroom should be careful; teachers should make sure that their students are mindful of the extreme bias before watching the movie, so that their opinions are not swayed by the negative portrayal of the country. The movie is helpful to show the relationship between the United States and Iran during them with the bias, but it should not be shown for the students to gain factual information about Iranian people. When watching this movie, I was personally quite shocked at the extent of how blatantly prejudiced it was, and I was gl ad that I was warned beforehand. The purpose of ‘Persepolis’ was also to tell the story of a person who was witness to the events in Iran during the changes that were happening. It does show a different point of view than we’re used to seeing, from a young girl. It was not as openly one-sided as ‘Not Without My Daughter’, and I think this would be a better film to show to students if it were a choice between the two, because the students would be able to connect more to a teenage lifestyle and see the differences between themselves and Marjane. I also think that an introduction by the teacher would be required as well, to remind students that most stories are one-sided. I enjoyed this movie, mainly because of the artistry that went into creating a black-and-white animation of a serious plot. It was also humorous at times, and that made it feel more like a real situation.