The document discusses foreign exchange risk and its management. It identifies four types of exchange rate risks that international businesses face: accounting/translation exposure, economic exposure, transaction exposure, and real operating exposure. It also outlines techniques for managing short-term transaction risk through hedging and long-term real operating risk through strategic adaptation, while noting translation risk is an accounting risk.

1. Foreign exchange risk management 07/13/11 Risk management - Rajendra Patra

2. Foreign exchange risk: meaning Value of a currency changes frequently Affects firms engaged in international transactions Assets, liabilities and cash flows are affected through changes in exchange rates Possibility of unfavourable changes - Risk 07/13/11

3. Types of risk/ exposure Accounting/ translation exposure: financial statements Economic exposure: cash flows Transaction exposure: present cash flows Real operating exposure: future cash flows 07/13/11

4. Translation exposure Occurs on consolidation of financial statements of different units of MNCs When the value of currency of a subsidiary changes, its translated value in the domestic currency of the parent company changes This change represents translation exposure It is only an accounting exposure 07/13/11

5. Transaction exposure Impact of exchange rate fluctuations on present cash flows From transactions already entered into Export and imort Borrowing and lending in foreign currency Intra firm fund flow in an international company 07/13/11

6. Real operating exposure Changes in exchange rates alter future operating revenues and cost streams of a company Changes in future cash flows from changes in exchange rates - real operating exposure 07/13/11

7. Foreign exchange risk: techniques of management Transaction risk (short term): Hedging using currency forwards or futures Real operating risk (long term): Adaptation in production and marketing strategy (plant location, input mixing, input sourcing, market selection, product planning, pricing, etc ) Translation risk: accounting risk 07/13/11