foreign exchange exposure and risk

8/9/2019 Foreign Exchange Exposure and Risk

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Foreign Exchange Exposure

and Risk.

World is changing faster than human

Endeavor


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Referred International Financial Managementby P.G. Apte, fifth edition 2

Currency Exposure

Short Term

a. Accounting ( Translation)

b. Cash Flow

I. Contractual( Transactions)II. Anticipated

Long Term

a. Operating

b. Strategic


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Exposure and Risk

Though exposure and risk are used interchangeably But Exposureis the measure of the sensitivity of

the value of the financial item( asset liabilities orcash flow) to change in relevant risk factor

while Riskis a measure of variability of the value ofthe item attributable to the risk factor. Example: Firm export import having significant

exposure to Foreign exchange rate. But may notperceive significant risk as the dollarrupee

exchange rate is stable for last so many months


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Translation Exposure

Translation exposure typically arise when a parentmultinational company required to consolidate aforeign subsidiary's financial statement

Example At the beginning of the financial year the

subsidiary has real estate, inventories and cashvalued at $100000, $200000, and $150000respectively the spot rate is 1$= 46 Rs, by the closeof financial year the values are changed as dollardepreciated to Rs at 1$ = 42Rs here the Indian

concern with USA subsidiaries will make huge lossof $450000*(Rs 46 Rs 42).


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Translation Loss or gain

The loss suffered by converting the assetsand liabilities from foreign currency todomestic currency is known as transaction

loss. Similarly for the gain.


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( Contractual) Transactions Exposures

It measures the sensitivity arises when the assets orliabilities are liquidated due to change in theexchange rate.

Examples: A currency has to be converted in orderto make or receive payment for goods and services-import payable or export receivables denominated ina foreign currency

A currency has to be converted to make a dividend

payment, royalty, payment and receivable to repayforeign loan and interest.


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Transaction Risk

An unanticipated change in the exchange rate hasan impact favorable or adverse on its cash flows.

Transaction risk can be defined as a measure ofvariability of assets and liabilities when they areliquidated. May lead to exchange gain or loss.

The key difference between transaction exposure andtranslation is that former has impact on cash flowswhile latter has no direct effect on cash flows. ( This

is true if there is no tax effects arising out oftranslational gains or loss. )


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Anticipated

Sometimes transaction is being negotiated,all terms more and less finalized but acontractual agreement yet to be entered into.


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Strategic exposure

The focus impact of cash flows of firm in years tocome

Horizon are long nothing is contractually fixed and

the impact of exchange rate fluctuations can havesubstantial, sustained implication

In long run exchange rate effect can undermine afirm's competitive advantage by raising by raising its

cost above the competitors cost.


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Unanticipated exchange rate change onfirms revenue, operating cost and operating

net cash flow over a medium term horizon

Change in exchange rate can affect onsales volume, input cost of importedmaterials, labour costs, interest costs,

inflation, income distribution


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Operating Exchange Exposure

Of two kind of long term exposure operatingand strategic .

Operating exposures capture the impact of

unanticipated exchange rate changes on thefirms revenue, operating costs and operating

net cash flows over a medium term say up to

three years.


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Thank You

Exposure can be Covered , Risk can beNeutralized completely it needs selfconfidence, patience and courage to be

Creative. Not stress , tension and frustrationto feel desperate..

foreign exchange exposure and risk

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