The following points highlight the three main types of foreign exchange exposure. The types are: 1. Transaction Exposure 2. Translation Exposure 3. Operating Exposure. Type # 1. Transaction Exposure: It refers to the sensitivity of the domestic currency value of foreign currency-denominated transactions arising from credit purchases and credit sales. Whenever a company makes credit purchases or credit sales invoiced [...]
Each overseas affiliate prepares its profit and loss statement and balance sheet, in its measurement currency. There are three aspects relating to translation. Currency for Translating the Affiliates' Financial Statements: The functional currency of MNC affiliates is the currency of the primary economic environment of the affiliate. In some countries—such as the USA—the accounting standard relating to translation prevents affiliates [...]
In this article we will discuss about the cost and types of hedging adopted by companies to mitigate exchange rate risk. Cost of Hedging: Companies use contractual and non-contractual methods to hedge exchange rate risk. Transaction exposure is hedged through contractual and non-contractual methods. Translation exposure can be hedged through contractual methods. Operating exposure is difficult to hedge given the [...]