Choi/Meek, 6/e 1

Transaction Exposure
Measures exchange gains and losses that arise
from the settlement of foreign currency sales,
purchases, borrowing, or lending transactions.
Multicurrency transaction exposure report
Enables parent company to monitor its global
transaction exposure by currency.
Choi/Meek, 6/e 2
Transaction Exposure (contin)
Involves assessing corporate strengths and
weaknesses as a basis for strategy
formulation
Choi/Meek, 6/e 3
Economic Exposure
Economic exposure is future-oriented and
examines the impact of exchange rate changes
on the future performance and cash flows of
the firm.
Choi/Meek, 6/e 4
Hedging Strategies
Balance sheet hedges: adjusts the levels and
currency of a firms exposed assets and
liabilities.
Operational hedges: adjusts variables, such
as selling prices and currency of
denomination, that impact foreign currency
sales and expenses.
Choi/Meek, 6/e 5
Hedging Strategies (contin)
Contractual hedges: uses financial instruments to
hedge a firms exposed assets and liabilities.
Types of financial instruments:
FX forward contract: an agreement to deliver or
receive a specified amount of foreign currency in
exchange for domestic currency on a fixed future date
at a fixed rate.
Financial futures: a commitment to purchase or deliver
a specified amount of foreign at a future date at a set
price.
Currency option: gives the buyer the right to buy or sell
a currency from the seller at a specified price on or
before a specified expiration date.
Currency swap: a current and future exchange of two
different currencies at predetermined rates.
Disclosure
Required disclosures under FAS 133 and IAS 39,
include the following :
Risk management objective and strategy for undertaking hedge transactions.
Description of the item being hedged.
Identification of the hedged items market risk.
Description of the hedge instrument.
Amounts that are excluded from the assessment of a hedges effectiveness.
A priori justification that a hedging relationship will be highly effective in
minimizing market risk.
Ongoing assessment of the actual hedging effectives of all derivatives used
during the period


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