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Ifm ...arya

Date post: 15-Jul-2015
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Presented by; Arya. S3 MBA GIMS,Kadakkal
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Page 1: Ifm ...arya

Presented by;

Arya.

S3 MBA

GIMS,Kadakkal

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Foreign Exchange…

Foreign exchange is the art and science of internationalmonetary exchange. The term foreign exchangeimplies two things;

Foreign currency

Exchange rate.

Foreign exchange is the international market for the freetrade of currencies. Traders place orders to buy onecurrency with another currency.

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FORIGN EXCHANGE MARKET.It is the market in which national currencies are traded

for one another. The major participants in this market

are commercial banks, Forex banks, and authorized

dealers and the monetary authorities.

Foreign currencies are bought and sold in the foreign

exchange market. The structure and functioning of the

forex market should be understood properly so that can

trade in this market efficiently. Both spot transactions

and forward transactions are executed.

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FORIGN EXCHANGE RISK…

Foreign exchange risk (also known as FX risk,exchange rate risk or currency risk) is a financialrisk that exists when a financial transaction isdenominated in a currency other than that of thebase currency of the company. It also exists when theforeign subsidiary of a firm maintains financialstatements in a currency other than the reportingcurrency of the consolidated entity. The risk is thatthere may be an adverse movement in the exchangerate of the denomination currency in relation to thebase currency before the date when the transaction iscompleted.

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Exchange risk simply means that the rate at which acurrency is exchanged for another currency may beuncertain and volatile and the amount that anexporter receives in domestic currency or an importerhas to pay in terms of domestic currency will beunpredictable and uncertain.

If funds are transmitted from one country to another , theamounts to be sent or to be received will not be certain ,if exchange rates are not fixed. But in the present globaleconomy , free market forces operate to determine theexchange rates depending upon the supply and demandfor the currency. This will lead to fluctuating rates ,which may result in profits or losses to the holders offoreign currency.

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Foreign Exchange ExposureThe impact of a particular risk factor on the operational

variables of a firm varies from one factor to another. Theextent of variability or sensitivity of the operationalvariables to change in a risk factor is referred to asEXPOSURE.

Foreign exchange exposure is the risk associated withactivities that involve a global firm in currencies otherthan its home currency.

It is the risk that a foreign currency may move in adirection which is financially detrimental to the globalfirm.

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Foreign Exchange Exposure & Risk..

More and more business firms are now facing foreignexchange exposure and risk.

The vulnerability of the firm’s assets, liabilities and cashflows to changes in exchange rates of foreigncurrencies is known as foreign exchange exposure.

The variability likely to be caused in the domesticcurrency values of assets, liabilities and cash flows offirms due to the changes in exchange rates f foreigncurrencies is known as foreign exchange risk.

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The increase in the volume of cross-border financial transactions on account of globalization has enhanced foreign exchange exposure, while higher volatility in exchange rates following the adoption of the floating exchange rate system has enhanced foreign exchange risk.

TYPES OF FORIGN EXCHANGE EXPROSURE & RISK.

1. Translation exposure

2. Economic exposure

a) Transaction exposure

b) Operating exposure

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Translation exposure.It also called accounting exposure. It arises in an

accounting process, namely consolidation of financial statements of foreign subsidiary companies denominated in foreign currencies. It affects the domestic currency values of assets and liabilities in the balance sheet, but doesn’t affect the cash flows of the business.

Economic exposure.on the contrary, affects the cash flows of

businesses engaged in international transactions.

Sensitivity of cash flows to unanticipated changes inthe exchange rates of foreign currencies is known aseconomic exposure.

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Economic exposure is further subdivided into;

Transaction exposure

Operating exposure

Transaction exposure;Changes in present cash flows arising from

foreign currency transactions already entered into by afirm are the results of transaction exposure.

Operating exposure;Changes likely to occur in the future cash flow

streams of a business from foreign currencytransactions in future on account of exchange ratefluctuations are referred to as operating exposure.

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Translation exposure/ Accounting exposure.

→The sensitivity of the values of assets, liabilities andprofits of a multinational company to changes inexchange rates is referred as translation exposure.

→Results from a firm taking on “fixed” cash flow foreigncurrency denominated contractual agreements.

→The values of assets and liabilities of a subsidiary mayshow an increase or decline depending on themovements in the exchange rates of the currencies.

→It doesn’t affect the cash flows of the business.→The impact is reflected in the published financial

statements of multinational company.

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Examples of translation exposure:

An Account Receivable denominate in a foreign currency.

A maturing financial asset (e.g., a bond) denominated in a foreign currency.

An Account Payable denominate in a foreign currency.

A maturing financial liability (e.g., a loan) denominated in a foreign currency.

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Economic exposure.

→Results from the “physical” entry (and on-goingpresence) of a global firm into a foreign market.

→This is a long term foreign exchange exposure resultingfrom a previous FDI location decision.

→These are really “future” transaction exposures which areunknown today.

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Operating exposure.

→The variability in the future operating revenue, costand profit of firms on account of unexpected exchangerate fluctuations in future is termed as operatingexposure.

→It has longer time horizon.

→It refers to the impact of exchange rate fluctuations onfuture cash flows.

→It is the sensitivity of future operating profits tounanticipated changes in the exchange rate.

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Transaction exposure.

→The variability in domestic currency values of cashflows arising from cross-border transactions alreadyentered into by firms or individuals is termed astransaction exposure.

→It is other ways referred to as contractual exposure, asthe foreign currency values of cash flows are fixedcontractually.

→It arises in transactions of cross-border borrowing andlending. Domestic borrower borrows funds in foreigncurrency from a lender in a foreign country.

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Operating exposure

(Revenues and Costs)

The Two Channels of Economic Exposure

MNC’s

Competitive

Position and Value

Impact on the home

currency value of

foreign assets and

liabilities

Impact on home

currency amount of

future operating

cash flows

Exchange

Rate

Fluctuations

Foreign currency

denominated asset

& liability exposure

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