Foreign Exchange Exposure and Risk
Transcript of Foreign Exchange Exposure and Risk
-
8/9/2019 Foreign Exchange Exposure and Risk
1/13
Foreign Exchange Exposure
and Risk.
World is changing faster than human
Endeavor
-
8/9/2019 Foreign Exchange Exposure and Risk
2/13
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
-
8/9/2019 Foreign Exchange Exposure and Risk
3/13
Referred International Financial Managementby P.G. Apte, fifth edition 3
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
-
8/9/2019 Foreign Exchange Exposure and Risk
4/13
-
8/9/2019 Foreign Exchange Exposure and Risk
5/13
Referred International Financial Managementby P.G. Apte, fifth edition 5
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).
-
8/9/2019 Foreign Exchange Exposure and Risk
6/13
Referred International Financial Managementby P.G. Apte, fifth edition 6
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.
-
8/9/2019 Foreign Exchange Exposure and Risk
7/13
Referred International Financial Managementby P.G. Apte, fifth edition 7
( 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.
-
8/9/2019 Foreign Exchange Exposure and Risk
8/13
Referred International Financial Managementby P.G. Apte, fifth edition 8
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. )
-
8/9/2019 Foreign Exchange Exposure and Risk
9/13
Referred International Financial Managementby P.G. Apte, fifth edition 9
Anticipated
Sometimes transaction is being negotiated,all terms more and less finalized but acontractual agreement yet to be entered into.
-
8/9/2019 Foreign Exchange Exposure and Risk
10/13
Referred International Financial Managementby P.G. Apte, fifth edition 10
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.
-
8/9/2019 Foreign Exchange Exposure and Risk
11/13
Referred International Financial Managementby P.G. Apte, fifth edition 11
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
-
8/9/2019 Foreign Exchange Exposure and Risk
12/13
Referred International Financial Managementby P.G. Apte, fifth edition 12
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.
-
8/9/2019 Foreign Exchange Exposure and Risk
13/13
Referred International Financial Managementby P.G. Apte, fifth edition 13
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..