Exposure in international finance


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Exposure in international finance

  1. 1. Exposures in International Finance Presented By :Anu Mishra M.B.A 3rd Sem B.U
  2. 2. Meaning of International finance:• The economic interaction among different nations involving the monetary payments and the exchange of currency.• A summary of international trade undertaken by a particular nation is given with the balance of payments.
  3. 3. Meaning of Exposure in International Finance• Exposure is a measure of the extent to which a person faces foreign exchange risk• In general, there are two types of exposure: accounting and economic – Economic exposure is more important •
  4. 4. • Transaction exposure: – “A transaction involving purchase or sale of goods or services with the price states in foreign currency is incomplete until the amount in dollars necessary to liquidate a related payable or receivable is determined”• Accounting exposure is: – Of concern to MNCs that have subsidiaries in a number of foreign countries – Important to people who hold foreign securities and must prepare dollar-based financial reports.
  5. 5. Economic Exposures:• Economic exposure measures the risk that the value of a security will decline due to an unexpected change in relative foreign exchange rates• Security analysts should include expected changes in exchange rates in forecasted cash flows
  6. 6. Exposure in International Finance:• Political risk• Financial risk• Economic risk• Market risk• Exchange rate risk• Operational risk• Legal risk• Hedging risk• Systemic risk
  7. 7. • Market risk The risk that the value of a portfolio, either an investment portfolio or a trading portfolio, will decrease due to the change in value of the market risk factors. The four standard market risk factors are stock prices, interest rates, foreign exchange rates, and commodity prices.• Legal risk The risks that counterparty are not legally able to enter into a contract. Another legal risk relates to regulatory risk, i.e., that a transaction could conflict with a regulators policy or, more generally, that legislation might change during the life of a financial contract.• Financial risk an umbrella term for multiple types of risk associated with financing, including financial transactions that include company loans in risk of default. Risk is a term often used to imply downside risk, meaning the uncertainty of a return and the potential for financial loss.
  8. 8. • Hedging Risk: A risk associated with the limiting or off setting probability of loss from fluctuations in the prices of commodities, currencies, or securities.• Systemic risk The risk of collapse of an entire financial system or entire market, as opposed to risk associated with any one individual entity, group or component of a system.• Operational risk A risk arising from execution of a companys business functions. It is a very broad concept which focuses on the risks arising from the people, systems and processes through which a company operates. It also includes other categories such as fraud risks, legal risks, physical or environmental risks.
  9. 9. • Banking :Extent to risk.• Finance: Amount that one can lose; generally cash and notes payable.• International Finance: In foreign exchange and futures market trading, the potential for suffering a gain or loss from fluctuations in market prices.