Question

In: Finance

Discuss the difference between transaction and economic exposure.

Discuss the difference between transaction and economic exposure.

Solutions

Expert Solution

Basis of difference

Transaction exposure

Economic exposure

Flow of cash

Transaction exposure is driven by transactions which have just been contracted for and henceforth they are of here and now nature. For instance: if Company A, situated in the US has just provided products worth $100 Mio to another Company B in the UK and has consented to get the instalment in GBP, it has just embraced transaction risk on money streams.

Economic exposure is transaction exposure and working exposure which is identified with future money streams. These money streams are not understood or contracted for and the exposure is more expectant in nature. Economic exposure can emerge because of progress in future deals, volume, evaluating or cost profile.

Nature of risk

Risk related is constrained to the agreement or transaction under exchange

Risk related effects the center estimation of a business as opposed to one specific transaction or contract and is the risk to show estimation of future working money streams

Identification

Transaction risk is the most effectively identifiable outside trade risk

Given its expectant nature, economic exposure isn't anything but difficult to recognize

jeff jeffy answered 2 years ago
Next > < Previous

Related Solutions

Distinguish between the following types of foreign exchange exposure: Transaction exposure Economic exposure Translation exposure Given...
Distinguish between the following types of foreign exchange exposure: Transaction exposure Economic exposure Translation exposure Given 1 example for each.
(a)What is exchange rate risk? Distinguish between Transaction Exposure and Economic exposure to exchange rate movements....
(a)What is exchange rate risk? Distinguish between Transaction Exposure and Economic exposure to exchange rate movements.      (b)Consider the following information:             90-day U.S interest rate………………………………………………………….4%             90-day Malaysian interest rate……………………………………………….3%             90-day forward rate for the Malaysian Ringgit ……………………..$0.400             Spot Rate of Malaysian Ringgit ………………………………………………$0.404 Assume a U.S based MNC will need 300,000 Ringgit in 90 days and wishes to hedge this payable position. Would it be better off using a FORWARD hedge or MONEY MARKET hedge?     
Briefly describe the following items: 1.Transaction exposure, economic exposure and translation exposure. Which exposure is more...
Briefly describe the following items: 1.Transaction exposure, economic exposure and translation exposure. Which exposure is more relevant to multinational corporation? Please explain 2.Purchasing power parity and Interest rate parity, and their linkage.
Which of the following is an example of economic exposure but not an example of transaction...
Which of the following is an example of economic exposure but not an example of transaction exposure? A decrease in the peso's value decreases a U.S. firm's dollar value of peso receivables An increase in the pound's value increases a U.S. firm's cost of British pound payables. An increase in the dollar's value impacts a U.S. firm's domestic sales because foreign competitors are able to increase their sales to U.S. customers. A decrease in the Swiss franc's value decreases the...
How would you rank the relative importance of transaction exposure, economic exposure, and translation exposure? Explain...
How would you rank the relative importance of transaction exposure, economic exposure, and translation exposure? Explain your answer. If you are the decision maker, will you hedge translation exposure? There are two approaches of hedging: 1) hedge only when we expect an unfavorable movement in foreign exchange rate, and 2) hedge anyway regardless of our expectation of exchange rate movements. Which approach would you use and why?
conducting a comparison of the alternatives to hedge transaction exposure. Discuss what operating exposure is and...
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.
Explain balance sheet exposure, and discuss how it differs from transaction exposure.
Explain balance sheet exposure, and discuss how it differs from transaction exposure.
a) Compare and contrast transaction exposure and economic exposure. Why would an MNC consider examining only...
a) Compare and contrast transaction exposure and economic exposure. Why would an MNC consider examining only its “net” cash flows in each currency when assessing its transaction exposure? b) Your employer, a large MNC, has asked you to assess its transaction exposure. Its projected cash flows are as follows for the next year. Danish krone inflows equal DK50,000,000 while outflows equal DK40,000,000. British pound inflows equal £2,000,000 while outflows equal £1,000,000. The spot rate of the krone is $.15, while...
One of the ways to reduce economic and transaction exposure is to restructure. This restructuring involves...
One of the ways to reduce economic and transaction exposure is to restructure. This restructuring involves shifting sources of revenues and costs to other locations in order to match cash inflows and outflows in foreign currencies. Explain the basics of this approach and did the MNC that you chose to write your report on, undertake any such restructuring? Would this restructuring increase translational risk? Does it make sense for an MNC to reduce one risk at the cost of exposing...
One of the ways to reduce economic and transaction exposure is to restructure. This restructuring involves...
One of the ways to reduce economic and transaction exposure is to restructure. This restructuring involves shifting sources of revenues and costs to other locations in order to match cash inflows and outflows in foreign currencies. Explain the basics of this approach and did the MNC that you chose to write your report on, undertake any such restructuring? Would this restructuring increase translational risk? Does it make sense for an MNC to reduce one risk at the cost of exposing...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT