Foreign Exchange Exposure Transaction exposure and operating exposure exist because of unexpected changes in future cash flows The difference between the two is that transaction exposure is concerned with future cash flows already contracted for,while operating exposure focuses on expected (not yet contracted for)future cash flows that might change because a change in exchange rates has altered international competitiveness
Foreign Exchange Exposure Transaction exposure and operating exposure exist because of unexpected changes in future cash flows. The difference between the two is that transaction exposure is concerned with future cash flows already contracted for, while operating exposure focuses on expected (not yet contracted for) future cash flows that might change because a change in exchange rates has altered international competitiveness
Accounting exposure Accounting exposure,also called translation exposure,is the potential for accounting- derived changes in owner's equity to occur because of the need to "translate"foreign currency financial statements of foreign subsidiaries into a single reporting currency to prepare worldwide consolidated financial statements
Accounting exposure Accounting exposure, also called translation exposure, is the potential for accounting- derived changes in owner’s equity to occur because of the need to “translate” foreign currency financial statements of foreign subsidiaries into a single reporting currency to prepare worldwide consolidated financial statements
Tax Consequence The tax consequence of foreign exchange exposure varies by country. As a general rule,however,only realized foreign exchange losses are deductible for purposes of calculating income taxes. Similarly,only realized gains create taxable income. "Realized"means that the loss or gain involves cash flows
Tax Consequence The tax consequence of foreign exchange exposure varies by country. As a general rule, however, only realized foreign exchange losses are deductible for purposes of calculating income taxes. Similarly, only realized gains create taxable income. “Realized” means that the loss or gain involves cash flows
Why Hedge? MNEs possess a multitude of cash flows that are sensitive to changes in exchange rates, interest rates,and commodity prices. These three financial price risks are the subject of the growing field of financial risk management. Many firms attempt to manage their currency exposures through hedging
Why Hedge? MNEs possess a multitude of cash flows that are sensitive to changes in exchange rates, interest rates, and commodity prices. These three financial price risks are the subject of the growing field of financial risk management. Many firms attempt to manage their currency exposures through hedging
Why Hedge? Hedging is the taking of a position,acquiring either a cash flow,an asset,or a contract (including a forward contract)that will rise (fall)in value and offset a fall (rise)in the value of an existing position. While hedging can protect the owner of an asset from a loss,it also eliminates any gain from an increase in the value of the asset hedged against
Why Hedge? Hedging is the taking of a position, acquiring either a cash flow, an asset, or a contract (including a forward contract) that will rise (fall) in value and offset a fall (rise) in the value of an existing position. While hedging can protect the owner of an asset from a loss, it also eliminates any gain from an increase in the value of the asset hedged against