Question

Explain Transaction Exposure and why this may be a potential foreign exchange risk for an Australian business exporting internationally. Discuss how Leading and Lagging strategies could be appropriate for managing risk. Your answer should include three citations.

Answer 1

Transaction exposure is the uncertainty level of business involved in the international trade. There is currency exchange risk which fluctuates after a firm under take financial obligation; the transaction exposure can maintain this. It is he risk faced by companies who are engaged in the trade, exist in any worldwide market. High level of sensitivity of exchange rate fluctuation cause financial loss. The risk of currency in exchange emerged by the business organisation which is going to execute business transaction in a foreign currency.

In Australia, there is flexible exchange rate which contributed to the macroeconomic stability. The benefits of flexible exchange rate depend on how individual enters in the currency movements. The sharp depreciation of exchange rate affects the balance sheet. Special preference to hedging behaviour helps to reduce the vulnerability of particular sector in Australian economy. High rate of hedging is one of the most important features of Australia economy. Depreciation of Australian dollar increase the dollar value of foreign currency which relative to liabilities. Continues hedging can raise the foreign currency position. There is a large share of country’s foreign currency liabilities.

Lagging indicator shows the downturn or upward of currency flow in an economy. It can analyze the current pattern with respect to the previous trading period. Delaying the receipt of remittance is lagging. If local currency expected to depreciate the local exporter release the payment at early rate is leading. This leading ad lagging helps the trading companies to manage cash management. Taking appropriate measures in case of leading ad lagging strategies can help to avoid accidental risks faced by companies during the international market.