Question

conducting a comparison of the alternatives to hedge transaction exposure. Discuss what operating exposure is and examine the origins of the operating exposure. What are some alternatives to manage operational exposure? Finish the discussion of operating exposure by introducing translation exposure. Last, analyze different translation methods.

Answer 1

First of all when we are looking for alternative for transaction exposure. We should understand the meaning of the same. A transaction exposure is mainly involved in international trade. It is a risk that currency exchange will change after the countries have came into agreements such kind of the exposures can leads to major losses.

Now the question here arises that what operating exposure is :

The variation in a firm’s future cash flow is the operating exposure. It can be incurred due to Anu unexpected incident in the currency exchange rates. Its the risk that will affect the present value of the firm’s future cash flow, the risk involved is of adverse foreign exchange movements. We can identify that both operating exposure as well as transaction exposure are related to foreign exchange adverse movements. The difference we can dig out is the operating exposure just measure the risk and uncertainty where as transaction exposure measures the effects in change in the spot rate.

If these causes have to numbered then they should be counted as below.

1. There is a change in the domestic currency.
2. There is a change in the foreign currency in which the money is vested.
3. The competitiveness of the company in which exports or imports are serving is been changing adversely .
4. Last but not the least changes in the fiscal or government financial policies.

So above can be considered as the causes of evolution of operating exposures. Bear in mind these can’t be calculated precisely like other two exposures.

We can go through some of the alternatives to manage the operateng exposure by following:

1.It can be through product diversification. We can enter a new market with a considerably new impactful product.

2. Secondly it can be a vice versa that is market diversification.Introducing a new product in a new market.

3. It can be through finance diversification. Making or finding new ideas of investing the money or may be through different sources.

Lastly, after considering the transaction as well as operating exposures we will review and analyse how it is going to affect the equities and liabilities of the firm. So the exposure that it is going to affect the equities and liabilities of the firm is called translation exposure. Mainly it is a result of the actions when most of the assets, equities and liabilities are denominated in foreign currency.

Various methods to put these exposure aside can be pointed as :

1. It can be the most effective use of the cost accounting evaluation procedures.
2. It can be framed through consolidated financial statements
3. Sometimes it can be shown in the financial statements as the currency exchange loss or gain
4. There is also hedging of the translation risk which can be adjusted by purchasing the foreign currency that lowers this risk ir it can be made through currency swaps or currency futures.