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Foreign exchange risk management
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- 2. page 2 WHATISFOREXEXPOSURE • Refersto the risk associated with the foreign exchange rates that change frequently and can have an adverse effect on the financial transactions denominated in some foreign currency rather than the domestic currency of the company.
- 3. Translation Exposure Occurs at thetime of recording of the assets and liabilities of a company Economic Exposure caused by the effect of unexpected currency fluctuations on a company’s future cash flows, foreign investments and earnings. Transaction Exposure level of risk companies involved in international trade face page 3 TYPESOFFOREX EXPOSURES
- 4. • Translation exposureis the risk that a company's equities, assets, liabilities or income will change in value as a result of exchange rate changes • This occurs when a firm denominates a portion of its equities, assets, liabilities or income in a foreign currency • also known as "accounting exposure page 4 TranslationExposure
- 5. • It iscaused by the effect of unexpected currency fluctuations on a company’s future cash flows, foreign investments and earnings. • It is also known as operating exposure • It can have a substantial impact on a company’s market value page 5 EconomicExposure
- 6. • Transaction exposureis the level of risk companies involved in international trade face • Specifically, the risk that currency exchange rates will change after a company has already entered into financial obligations • A high level of exposure to fluctuating exchange rates can lead to major losses for firms page 6 TransactionExposure
- 7. page 7 TRANSLATION EXPOSUREHEDGING TECHNIQUES Current or NonCurrent Monetary or Non Monetary Temporal Current Rate
- 8. page 8 • Current/ non current method-Under this, current assets and liabilities are valued at current rate & non- current assets and liabilities at historical rate • Monetary/ non monetary method- all monetary items(cash, marketable securities, receivables, notes payable etc) are valued at current rates and non-monetary items at historical rates • Temporal method- Under this method the inventory and investments are translated at current rate if they are valued at the market price • Current Rates-Under this method all assets, liabilities, income & expenses are translated at current rates of exchange
- 9. Marketing Strategies • Marketselection- Deciding in which markets to sell and from which unprofitable one’s to pull out • Pricing policies- a firm has to make a decision regarding market share versus profit margin • Promotional strategies-An essential issue in any marketing program is the size of the promotional budget for advertising, selling and merchandising. These budgets should explicitly build in exchange rate impact Production strategies • Diversifying operations-One possibility to dealing with the impact of exchange rate exposure on the firm's cash flows is to have the firm diversify into activities • Diversifying sources of inputs-the goal of a production strategy should be to reduce operating costs • Plant location-obvious way to be able to take advantage of relative costs changes due to real currency movements is to have production costs based in different currency by actually having production capacity in different countries EconomicExposureHedgingTechniques page 9
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- 11. Leading & Lagging manipulating currency cashflows in accordance with the fluctuations Re-envoicing centers single third-party subsidiary used to conduct all intra- company trades Currency risk sharing The two parties involved in the deal can have the understanding to share the transaction risk. page 11 NATURALHEDGES
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