Foreign Exchange Risk Exposure

By: Sumit Jain (051) Sumit Sedha (043)

Foreign Exchange
The Foreign Exchange implies two things Foreign Currency Exchange Rate

Foreign Exchange Market

The market where commodity traded is Currency. Price of each currency is determined in terms of other currency. Major participants
Commercial Banks Forex Brokers Authorised Dealers

Foreign Exchange Risk

Foreign Exchange Risk is the risk that the value of an asset or a liability will change because of change in Currency Exchange Rates. Carrying asset or liability in any currency gives rise to foreign exchange risk.

Foreign Exchange Risk

This risk usually affects businesses that export and/or import Investors making International Investments

Types of Foreign Exchange Risk

Transaction Risk : The risk that the domestic cost or proceeds of a transaction may change Translation Risk : The risk that the translation of value of foreign-currency-dominated assets is affected by rate changes Economic Risk : The risk that the exchange rate changes may affect the present value of future income streams

Transaction Exposure Risk

Refers to the extent to which the future value of a firms domestic cash flow is affected by exchange rate fluctuations. Changes in the value of contract between its signing and its execution. Denominate all contracts in domestic currency and prefer Hedging in both goods and currency.

Translation Exposure Risk

Gains or Losses from exchange rate changes that occur as a result of converting financial statements from one currency to another in order to consolidate them. Translation Exposure = (Assets - Liabilities) x (change in exchange rate) Forward Market Contracts

Economic Exposure Risk

Changes in competitive position as a result of permanent changes in exchange rates. Every company buying or selling abroad or even just competing with foreign companies has economic risk.

Risk Management
Translation risk: accounting risk Transaction risk (short term):
Hedging using currency forwards or futures

Economic risk (long term):

Adaptation in production and marketing strategy (plant location, input mixing, input sourcing, market selection, product planning, pricing, etc )

Conclusion
By incorporating Foreign Exchange Risk Measures into broader business strategy, one can protect his profitability by managing the exposure to exchange rate changes.

Thank You !!!