Management of Foreign Exchange Exposure

Management of Foreign
Exchange Exposure
Dr. S K MAHAPATRA
DEPARTMENT OF COMMERCE
GAUHATI UNIVERSITY
MANAGING TRANSACTION EXPOSURE
INTERNAL HEDGING TECHNIQUES EXTERNAL TECHNIQUES
 Exposure Netting  Forwards

 Leading and lagging  Futures
 Choosing Currency of  Swaps
Invoicing  Options
 Hedging through  Money Market
Sourcing
Exposure Netting
• Netting implies offsetting exposures in one
currency with exposure in the same or another
currency, where exchange rates are expected to
move high in such a way that losses or gains on
the first exposed position should be offset by
gains or losses on the second currency exposure.
• The netting is typically used only for inter
company flows arising out of groups receipts and
payments. It is applicable only to the operations
of a multinational company
Leading and lagging
It refers to the adjustment of

intercompany credit terms.
Leading means a prepayment of a trade

obligation.
Lagging means a delayed payment.

Choosing Currency of Invoicing
Invoicing all transactions in

domestic currency.
Exports can be in hard currency

and import in a soft currency.
Risk is to be assumed by the

foreign counterpart.
Hedging through Sourcing
It is a type of exposure netting.
Adjusting by matching the inflow and

outflow in the same foreign currency.
MANAGING TRANSLATION EXPOSURE
Current/Non-current Method
Monetary/Non-monetary Method
Currency Translation
Method
Temporal Method
Current Rate Method

Current/Non-current Method
The values of all the current assets and
CURRENT ASSETS & LIABILITIES liabilities of a foreign subsidiary are
translated into the home currency of the
parent company at the current spot
exchange rate.
The values of all the non-current assets
NON-CURRENT ASSETS & LIABILITIES and liabilities of a foreign subsidiary are
translated in historical exchange rate.
INCOME STATEMENTS ASOCIATED WITH Translated at average exchange rate
CURRENT ASSETS & LIABILITIES during the reference period.
INCOME STATEMENTS ASOCIATED WITH Translated at the exchange rate
NON-CURRENT ASSETS & LIABILITIES corresponding items in the balance sheet.
LIKE DEPRECIATION, AMORTIZATION, i.e. the historical exchange rate.
WRITEOFF ETC.
Monetary/Non-monetary Method
Monetary Items Non-monetary Items
Monetary Assets and liabilities are Non-monetary assets and liabilities
those that involve contractual cash do not have contractual pay-offs.
flows. These assets represent a claim These are real assets and liabilities.
to receive whereas liabilities involve
an obligation to pay at a specific
known time.
Balance Sheet related Items: Balance Sheet related Items :
Translated at current spot exchange Translated at historical exchange
rate. rates.
In case of Income statement, In case of Income statement,
translated at average exchange rate translated at historical exchange rate
of the reference period. of the corresponding reference
period.
Temporal Method
Point of Consideration: Balance sheet item is originally evaluated at
historical cost or market value.
If stated at Historical Cost: Translation of assets and liabilities at historical

exchange rates.
If stated at Market Value: Translation of assets and liabilities at the current

spot exchange rate.
Income statements are translated at average exchange rate during the

reference period, but cost of goods sold, depreciation and amortization
charges are translated at historical cost only.
Current Rate Method
Under this method, all items of balance sheet and income

statement are translated in current spot exchange rate.
If the value of foreign currency denominated assets is more

than that of the foreign currency denominated liabilities, a
depreciation of home currency will result in a loss and
appreciation of home currency will result in a gain.
Managing Operating Exposure
PRODUCT & MARKET STRATEGY: Introduction of New Product and
expansion of market.
PRODUCTION STRATEGY: Sourcing of inputs, Plant Location, Using

Alternative Plants.
PRICING STRATEGY: Review of pricing from time to time to see the impact
on revenue and develop pricing strategies.
TECHNOLOGY: adoption to new technology with higher productivity and

lower cost.
Thank you all.

Management of Foreign Exchange Exposure

Uploaded by

Copyright:

Available Formats

Management of Foreign Exchange Exposure

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Management of Foreign Exchange Exposure

Uploaded by

Copyright:

Available Formats

Management of Foreign

 Exposure Netting  Forwards

It refers to the adjustment of

Leading means a prepayment of a trade

Lagging means a delayed payment.

Invoicing all transactions in

Exports can be in hard currency

Risk is to be assumed by the

It is a type of exposure netting.

Adjusting by matching the inflow and

Current Rate Method

If stated at Historical Cost: Translation of assets and liabilities at historical

If stated at Market Value: Translation of assets and liabilities at the current

Income statements are translated at average exchange rate during the

Under this method, all items of balance sheet and income

If the value of foreign currency denominated assets is more

PRODUCTION STRATEGY: Sourcing of inputs, Plant Location, Using

TECHNOLOGY: adoption to new technology with higher productivity and

You might also like

Pfad - The Proxy pFad of © 2024 Garber Painting. All rights reserved.