Question

Analyze impacts of exchange rate exposures on the company’s performance for determining if a loss occurred because of fluctuations or devaluations of foreign currencies, providing examples from the past year to support your claims

Answer 1

A company is exposed to various kinds of fluctuations due to exchange rate risk.this could either be transaction exposure or translation exposure or Economic exposures.

These exposes are to be identified according to their nature as transaction exposure is the exposure when a company takes various kinds of transaction in other currency and it is exposed to the movement of that currency so this kind of risk will always lead to transaction exposure.

Translation exposure is related to translations of subsidiary books of account into the parent book of accounts. It will help to convert the subsidiaries financial statement and getting it incorporated into the parent books so that it exposes the company to translation risk because subsidiary book are recorded originally in foreign currency.

This type of exposure leads to fluctuation in value of company as these exposures are are highly fluctuating in nature and they can be substantially impacting the overall value of the company in the short run because these exposes are to be recorded mark to market due to general accepted accounting principles across the world.

So, these exposes needs to be managed in order to control the overall risk associated with fluctuation in the foreign currency and company can prosper in the long run by managing its overall exposure related to fluctuation in foreign currency so these exposes need to be managed.

This can be exampled through Jaguar Limited, books of accounts when it is to be incorporated in the books of Tata motors Limited which is the parents company and it exposes to the fluctuation of exchange rate between Indian currency and British currency