Question

In: Finance

Under which conditions would a subsidiary Malaysian MNC envisage using a "leading" currency transaction risk reduction...

Under which conditions would a subsidiary Malaysian MNC envisage using a "leading" currency transaction risk reduction strategy?? Under which circumstances would the same subsidiary consider using a strategy to reduce the exposure to currency transactions?

Solutions

Expert Solution

Leading transaction risk reduction strategy is focused at payment of foreign exchange exposure early because the entity will be expecting that the payables will be increasing because there will be stronger foreign currency so they will be trying to dispose of their payables as quickly as possible at the time when the exchange rate of the foreign currency is lower so that overall payments in the foreign currency will be lower so these payments which are made before the time period in order to avoid the risk of increasing foreign currency payable due to appreciation of the foreign currency is known as leading

In this case, the subsidiary Malaysian multinational corporations will be trying to to apply the strategy of leading when the foreign currency payables will be there for the company and there will be any risk of increasing and appreciation of foreign currency due to which they are over of foreign currency exposure will be increasing.

Same subsidiary will be considering using risk sharing approach in order to reduce the exposure to the foreign currency by sharing of the risk with the other entity in which the company is entering into the transaction so risk sharing approach is another approach by which the company can reduce the exposure to the foreign transactions by netting off the risk for the company can also try to have more of the domestic exposure by building the export and import in same currency,so it will be having a netting exposure effect also.


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