Question

(i)    A yen commercial exposure based on forecasted receivables less payables of $900 million

(ii)    An investment exposure resulting from equity stakes in several Japanese companies

(iii)    A financing exposure through a yen-denominated bond issue resulting in $500 million worth of outstanding yen-denominated bonds

For (i)-(iii), what type of exposures are these? Explain. How are (i)-(iii) affected by movements in the exchange rate? If the exchange rate moves from 117 Yen/USD to 111 Yen/USD, how do the exposures in (i)-(iii) affect GM?

Translation, transaction or operating

Answer 1

A. Type of exposure

(i) A yen commercial exposure based on forecasted receivables less payables of $900 million

Exposure is operating , as it relates to Trade Receivable and payable which is being part of operations.

(ii) An investment exposure resulting from equity stakes in several Japanese companies

Exposure is Transaction exposure, as it isgoing to transaction of investment.

(iii) A financing exposure through a yen-denominated bond issue resulting in $500 million worth of outstanding yen-denominated bonds

Transalation Exposure, as yen-denominated bond issue resulting in $500 million worth of outstanding yen-denominated bonds

B. Effect of movement is exchage rate from 117 Yen/USD to 111 Yen/USD

It shows that Rate of USD is depreciating as compared to Yen

(i) A yen commercial exposure based on forecasted receivables less payables of $900 million

A change in exchange rate will affect theamount to be received in Yen i.e Amount will be received as Yen 99900 inspite of Yen105300

(ii) An investment exposure resulting from equity stakes in several Japanese companies

Change in exchange rate will result in Lower return as there is decrease in Rate of Yen from 117 to 111 ( Yen/USD)

(iii)  A financing exposure through a yen-denominated bond issue resulting in $500 million worth of outstanding yen-denominated bonds

A change in exchange rate will affect in worth of Yen denominated bond in $ as Yen/USD is reduced from 117 to 111