In this chapter students understand and can recall methods for measuring and managing transaction exposure; the definitions, implementation, and use of CaR to measure exchange rate risk; students can calculate transaction exposure/loss, students can calculate CaR given cashflow information and exchange rate volatility. | Topic #12: Measuring and managing transaction exposure L. Gattis The Pennsylvania State University 1 Finance 407: Multinational Financial Management Poll 2 Caterpillar’s Japanese subsidiary has yen receivables of ¥100M, payables of ¥200M, and debt of ¥300M. The USD is designated the functional currency. The accounts are recorded on the balance sheet at a spot rate of ¥. What is the translation gain or loss if the exchange rate is ¥85 at the end of the reporting period. A. -$94,310 B. +$94,310 C. -$668M D. +$668M Poll 3 Caterpillar’s Japanese subsidiary has yen receivables of ¥100M, payables of ¥200M, and debt of ¥300M due in 45 business days. The USD is designated the functional currency. What is Caterpillars 95%, 45 day, EaR if the annualized volatility of the $/Yen daily returns is 10% and the spot price is $.012/¥ (¥$)? (Assume 260 business days in a year to compute daily standard deviation) A. $.033M B. $.33M C. $ D. $33M E. $330M Learning Objectives 4 Students . | Topic #12: Measuring and managing transaction exposure L. Gattis The Pennsylvania State University 1 Finance 407: Multinational Financial Management Poll 2 Caterpillar’s Japanese subsidiary has yen receivables of ¥100M, payables of ¥200M, and debt of ¥300M. The USD is designated the functional currency. The accounts are recorded on the balance sheet at a spot rate of ¥. What is the translation gain or loss if the exchange rate is ¥85 at the end of the reporting period. A. -$94,310 B. +$94,310 C. -$668M D. +$668M Poll 3 Caterpillar’s Japanese subsidiary has yen receivables of ¥100M, payables of ¥200M, and debt of ¥300M due in 45 business days. The USD is designated the functional currency. What is Caterpillars 95%, 45 day, EaR if the annualized volatility of the $/Yen daily returns is 10% and the spot price is $.012/¥ (¥$)? (Assume 260 business days in a year to compute daily standard deviation) A. $.033M B. $.33M C. $ D. $33M E. $330M Learning Objectives 4 Students understand and can recall methods for measuring and managing transaction exposure the definitions, implementation, and use of CaR to measure exchange rate risk Students can calculate transaction exposure/loss Students can calculate CaR given cashflow information and exchange rate volatility Forex Exposure 5 I. Translation “Accounting” Exposure arises when reporting and consolidating financial statements require conversion from foreign currency to home currency. It is a possible accounting gain/loss on foreign assets and liabilities which are reported as losses in income or adjustments to equity (Translation exposures often lead to cashflow losses when accounts are liquidated) II. Cashflow Exposures Transaction Exposure: potential gains or losses on foreign transactions such as bond payments and receivables paid in the foreign currency. (Up until a payment is made, these are only translation exposures) Competitive Exposure: long-term exposure to currency change on future business. .
