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Foreign exchange risk management

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Foreign exchange risk: meaning. Value of a currency changes frequently ... Borrowing and lending in foreign currency. Intra firm fund flow in an international company ... – PowerPoint PPT presentation

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Title: Foreign exchange risk management


1
Foreign exchange risk management
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

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

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

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

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

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
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