A MNC is subject to several different types of exposure: Translation, transaction, and economic. Which type...

A MNC is subject to several different types of exposure: Translation, transaction, and economic. Which type of exposure has the greatest impact on a MNC? Why? Which is the most difficult to manage? Why?

Give a specific example in relation to Puerto Rico.

Expert Solution

Transaction exposure deals with the actual foreign currency transaction and the cross-currency exposure arising out of the currency exchange. Translation exposure refers to the accounting representation due to changes in currency exchanges. The economic exposure deals with macro-level exposure which can be firm-specific or relating to the whole industry.

Out of all the exposure, transaction exposure has the greatest impact on an MNC. An MNC deals with various countries in various currencies. Due to this, the actual currency exposure due to the importing and exporting of goods is highest for an MNC. For eg. if an MNC operating in several countries including Puerto Rico, has some finished product manufactured in Puerto Rico and wants to sell those in United Kingdom, then it is exposed to the currency fluctuations between the time product is delivered and the time the creditors make their payment.

Economic exposure is the most difficult for an MNC to manage. This is because managing economic exposure involves prudent and objective view and enquiry of firm's operation locations, processes involved as well as the various currencies involved. Aggregating all these into utilizable reports can be translated into effective measures to contain the exposure, however, this requires grasping the gravity of operating exposure for the MNC which can be pretty difficult to estimate accurately.

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