forex exposure & risk,types!

1. DIFFERENTIATE FOREIGN
EXCHANGE EXPOSURE &
EXCHANGE RISK

2. FOREIGN EXHANGE EXPOSURE
It is defined as the extend to which the
transactions, assets and liabilities of an enterprise
are denominated in currencies other than the
reporting currency of the enterprise itself. The
reporting currency is normally the national
currency of the parent company. Exposure arises
because the enterprise denominates transaction in
a foreign currency or it operates in a foreign
market.

3. FOREIGN EXCHANGE RISK
Exchange risk is defined as the net potential gains
or losses which can arise from exchange rate
changes to the foreign exchange exposure of an
enterprise. It is possible that an adverse exchange
rate movement may turn an otherwise profitable
deal in to a loss. It is also possible that an un
expected movement in the exchange rate is
favorable and bring windfall profits.

4. DIFFERENCE BETWEEN FOREIGN
EXCHANGE EXPOSURE & EXCHANGE RISK
 Foreign exchange risk is related to the variability of the
domestic currency values of assets, liabilities or
operating income due to unanticipated changes in
exchange rates, whereas foreign exchange exposure is
what is at risk.
 Exposure relates to the total value of assets, liabilities or
cash flows of an enterprise denominated in foreign
currency, while exchange risk relates to the excess or
short fall in the cash flows or value of assets or
liabilities likely to arise on account of exchange rate
fluctuations.

5. TYPES OF FOREIGN EXCHANGE
EXPOSURE
Financial economists distinguish between
three types of currency exposures – transaction
exposures, translation exposures, and economic
exposures.
TRANSACTION EXPOSURE
Transaction exposure can be defined as the
sensitivity of realized domestic currency values of the
firms contractual cash flows denominated in foreign
currencies to unexpected exchange rate changes. It is
sometimes regarded as a short-term economic exposure.

6. TRANSALATION EXPOSURE
Transalation exposure is defined as the
likely increase or decrease in the parent company’s
net worth caused by a change in exchange rates
since last transalation. This arises when an asset or
liability is valued at the current rate.
Transalation exposure is measured as
the net of the foreign currency denominated assets
and liabilities value at current rates of exchange.

7. ECONOMIC EXPOSURE
Economic exposure can be defined
as the extend to which the value of the firm
would be affected by un anticipated changes in
exchange rates.
An economic exposure is a managerial
concept than an accounting concept. Economic
exposure to an exchange rate is the risk that a
change in the rate affects the company’s
competitive position in the market and hence,
indirectly the bottom – line.

8. TYPES OF FOREIGN EXCHANGE RISK
Many firms are exposed to foreign exchange
risk that is, their wealth is affected by movements in
exchange rates and will seek to manage their risk exposure.
There are different types of foreign exchange risk.
TRANSACTION RISK
This type of risk is primarily associated with
the imports and exports. If a company exports goods on
credit then it has a figure for debtor in its accounts. The
amount it will finally receive depends on the foreign
exchange movement from the transaction date to the
settlement date.

9. TRANSALATION RISK
The financial statements of overseas
subsidiaries are usually transalated into the home currency
in order that they can be consolidated into the group’s
financial statements. It is the transalation not the
conversion of real money from one currency to another.
ECONOMIC RISK
Transaction exposure focuses on relatively short
term cash flows effects, economic exposure en compasses
these plus the longer-term affects of changes in exchange
rates on the market value of a company.
Basically this means a change in the present value
of the future after tax cash flows due to changes in
exchange rates.

10. PRESENTED BY,
VINEETHA P
PRIYANKA