Foreign Exchange Risk

[abhishreshthaa]

Managing Foreign Exchange Risk

• Transaction Exposure- when benefits and costs of a transaction can be affected by exchange rate movements that occur after legal obligation.
  
  
• This can be managed in one of the following ways
• Go Naked, Buy forward, use options market, or acquire an offsetting asset.

Translation Exposure

• the impact on the firm’s consolidated financial statement of fluctuations in exchange rates that change the value of foreign subsidiary measured in parent country’s currency.
  
  
• this can be managed by a balance sheet hedge.
  
  
• Balance sheet hedge - a firm matches its assets in a given currency with its liabilities in the same currency
  

Economic Exposure

• This is unanticipated exchange -rate changes.
  
  
• This is more of a strategic issue and not a financial maneuver.
  
  
• Example of how value of US. dollar prompted location of foreign auto plants in the US.