In this chapter, students will be able to understand and can apply the following concepts to business situations: foreign exchange competitive exposure; real appreciation and depreciation; Identifying, measure, and managing competitive exposure. | Topic #4: The Identification, Measurement, and mitigation of Translation and transaction Foreign Exchange exposure L. Gattis 1 Global Financial Management Learning Objectives 2 Understand and can apply the following concepts to business situations types of foreign exchange exposure: Translation, Transaction, and Competitive Exposure Accounting fx translation methods and choice of functional currency methods for managing translation and transaction exposure the Risk Identification, Measurement, Mitigation approach Identify, Measure, and Mitigate translation and transaction exposure 3 Translation Exposure: potential reporting losses arising from exchange rate changes that result in a restatement in value of foreign-denominates assets and liabilities. ., . firm must reduce USD value of euro-denominated accounts receivable after EUR devalues. Losses may be reported in I/S and/or B/S. Transaction Exposure: potential short-term, cashflow losses arising from exchange rate changes that results in the payment of more USD or receipt of less USD. ., ., firm must pay more dollars to buy RMB to pay RMB-denominated invoice after appreciation of RMB against USD. Competitive Exposure: potential long-term, cashflow FX exposures that could affect business viability. ., Appreciation of Indian rupee makes outsourced manufacturing facility no longer competitive with outsourced Indonesian production. Types of Foreign Exchange Risks Exposure Netting 4 FX positions are aggregated to compute net exposure . MNC Example 1: €100M Account Receivable €70M Accounts Payable Net Exposure: €30M (“Exposed to Depreciation of the Euro”) “Long the euro” (Net Asset Position) . MNC Example 2: €50M Account Receivable €70M Accounts Payable Net Exposure: -€20M (“Exposed to Appreciation of the Euro”) “Short the euro” (Net Liability Position) The translation method determines which balance sheet items need to be revalued using current exchange rates and where the gains and losses are . | Topic #4: The Identification, Measurement, and mitigation of Translation and transaction Foreign Exchange exposure L. Gattis 1 Global Financial Management Learning Objectives 2 Understand and can apply the following concepts to business situations types of foreign exchange exposure: Translation, Transaction, and Competitive Exposure Accounting fx translation methods and choice of functional currency methods for managing translation and transaction exposure the Risk Identification, Measurement, Mitigation approach Identify, Measure, and Mitigate translation and transaction exposure 3 Translation Exposure: potential reporting losses arising from exchange rate changes that result in a restatement in value of foreign-denominates assets and liabilities. ., . firm must reduce USD value of euro-denominated accounts receivable after EUR devalues. Losses may be reported in I/S and/or B/S. Transaction Exposure: potential short-term, cashflow losses arising from exchange rate changes that
