Foreign Exchange Exposure

1. Foreign exchange
EXPOSURE
Vinod Koolath
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2. • Exchange Rate Risk is defined as the
variability of a firm’s value due to uncertain
changes in the rate of exchange.
• Exposure refers to the degree to which a
company is affected by the changes in
exchange rate. It can be favourable or
unfavourable.
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3. Types of Exposure
• Accounting or Translation Exposure
• Transaction Exposure
• Operating Exposure
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4. Translation Exposure
Translation Exposure arises from the need, for
purposes of reporting and consolidation, to
convert the financial statements of foreign
operations from local currency to home
currency
• Nominal gain or loss
• Retrospective in nature
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5. Translation Methods
• Current/ Non-Current Method
• Monetary/Non-Monetary Method
• Temporal Method
• Current Rate Method
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6. FASB-8(January 1,1976)
• Utilizes the temporal method for translating
Balance Sheet and Income Statement into home
currency
• Unrealized translation gains or losses were
recorded within the income statement thereby
affecting net income
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7. FASB-52(December 15,1981)
• Utilizes the current rate method for translating
Balance Sheet and Income Statement into home
currency
• Unrealized translation gains or losses are recorded in
a separate equity account on the parent company’s
consolidated Balance Sheet called “Cumulative
Translation Adjustment” account
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8. Reporting Vs Functional Currency
• The reporting currency is the currency in
which the parent company prepares its own
financial statements
• The functional currency is the currency of the
primary economic environment in which the
affiliate generates and expenses cash
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9. Transaction Exposure
It stems from the possibility of incurring
exchange gain or loss on transactions already
entered into and denominated in a foreign
currency
• Real exchange gain or loss
• Retrospective and prospective in nature
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10. Operating Exposure
It arises because currency fluctuations
combined with price level changes can alter
the amounts and riskiness of a firm’s future
revenues and costs
• Real exchange gain or loss
• Prospective in nature
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11. Thank You
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