corporate expos mgmt

8/8/2019 Corporate Expos Mgmt

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̀Accounting exposure arises from theneed, for purpose of reporting and

consolidation, to convert the financialstatements of foreign operations fromthe local currencies(LC) involved to

the home currency(HC).



TYPES OF ACCOUNTING EXPOSURE

TRANS ACTION

EXPOSURE

TRANSLATION

EXPOSURE



` Transaction exposure arises due to the fact thatthere is time difference between the date of conclusion of the contract and the discharge of

obligations, i.e. performance of the contract.(During this time period exchange rate moves andresulting in the gains or losses)

For example:- IBM----- mainframe computer------

Royal Dutch shell in England.



` The transaction exposure defines foreignexchange rate risk in terms of the impact of un-anticipated exchange rate movements on thefirm¶s future contractually committed cash flows.This type of exposure arises from the firm¶sobligation to accept or deliver a specified amount

of foreign currency at a future date.

` Example:- importer-> import machines->$100000@35---> delivery time 1 month--dollar@37---> loss of Rs. 200000.



` Accounts payable in foreign currencies

` Accounts receivable in foreign currencies

` Non-recorded commitments to pay in foreign currency

` Non-recorded commitments to accept payment inforeign currency

` Debt payments to be made in foreign currency

` Commitments to accept loan re-payments in foreigncurrency

` Anticipated payments from foreign subsidiaries` Un-performed forward exchange contracts



` Since exposure arises due to unanticipatedmovement of exchange rate and because of theopen positions in assets or liabilities or both,

therefore hedging involves entering into a financialcounter-transaction to offset the risk associatedwith a long or short unhedged position in a foreigncurrency at a future point in time.



` Forward Contract

` Money Market Hedge

` Future Contract

` Option Contract` Currency Invoicing

` Exposure Netting

` Currency Risk Sharing



` The translation exposure arises whenforeign currency balance sheets are

being consolidated with parent¶sbalance sheet. In this case of balancesheet items the assets and liabilities

are outstanding and that theobligations are yet to be met.



` Translation exposure of a corporationis simply the difference between the

exposed assets and liabilities.T

hegains and losses due to translationexposure are accounting in nature

there is no cash implications of translation exposure.



1. Monetary and Non-Monetary method

2. Temporal method

3. Current and non-current method

4. Current rate method



` This method distinguishes between monetaryassets and liabilities such as receivables andpayables and non-monetary assets and liabilities

such as physical assets and liabilities.M

onetaryitems are cash, accounts payables, accountsreceivables, etc. are translated at currentexchange rate and non-monetary items such as

inventory, fixed assets, long term investments aretranslated at historical rates.



` Under temporal method inventory isnormally translated at the historical

exchange rate but it can also betranslated at the current rate it theseare shown in the balance sheet at

market value.



` In this method, all current assets andliabilities are translated into domestic

currency at current exchange rate.Each non current item is translated athistorical exchange rate(i.e. at the

rate when it was purchased)



` In this method all balance sheet and incomestatement items are translated at current rateexcept equity.

` One variation is to translate all assets andliabilities except net fixed assets at the currentrate.

` Popular in England.



1) Adjusting cash flows(Funds adjustment)

2) Entering into forward contracts

3) Exposure netting

4) Other methods



` If foreign exchange exposure is to be reduced,asset should be converted to hard currencies andliabilities into soft currencies.

` Direct fund adjustment includes pricing export inhard currencies and imports in local currenciesreplace hard currency borrowings by localcurrency borrowings.

` The indirect fund adjustment is through transfer pricing, speeding of payments of dividend, feesand royalties. Adjustment of flow of funds throughleading and lagging.



` Forward contract can reduce a firm¶s transactionexposure by creating an offsetting asset or liabilityin the foreign currency. Any loss or gain on itstranslation exposure will then be offset by acorresponding gain or loss on its forward contract.The gain or loss on the forward contract is of acash flow nature and is netted against unrealizedtranslation loss or gain.



` Netting reduces the cost of transaction this ispossible only when the organization is operating ina multi-subsidiary and multi-currency environment.Even in the case of a party importing from andexporting to the same country, the receivables andpayables can be netted and the balance can behedged by a forward, future or option contract.



` Leading and lagging:- If parent company isexpected to appreciate against the currency of thesubsidiaries, the receivables should be lead and if

it is expected to depreciate against the currenciesof the subsidiaries, the receivable should belagged.

` Invoicing pricing(home currency)

` Transfer pricing(profit soft to hard currency)



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corporate expos mgmt

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