Explain common methods for controlling translation exposure, Financial Management

Assignment Help:

It is, usually, not possible to totally eliminate both translation exposure and transaction exposure.  In few cases, the elimination of one exposure will as well eliminate the other.  But in another cases, the elimination of one exposure in fact makes the other.  Discuss which exposure might be viewed like the most significant to effectively manage, if a conflict between controlling both takes place. As well, discuss and critique the common techniques for controlling translation exposure.

Answer:  As it is, usually, not possible to completely eliminate both transaction and translation exposure, we suggest that transaction exposure be given first priority as it includes real cash flows.  The translation procedure, on-the-other hand, has no direct influence on reporting currency cash flows, and will just have a realizable effect on net investment upon the sale or liquidation of the assets.

There are two general methods for controlling translation exposure:  a balance sheet hedge and a derivatives hedge. The balance sheet hedge includes equating the amount of exposed assets in an exposure currency along with the exposed liabilities in that currency, thus the net exposure is zero. So when an exposure currency exchange rate changes versus the reporting currency, the change in assets will offset the change in liabilities. To form a balance sheet hedge, one time transaction exposure has been controlled, frequently means creating new transaction exposure. This is not wise as real cash flow losses can result.  A derivatives hedge is not actually a hedge, but rather a speculative position, as the size of the “hedge” is based upon the future expected spot rate of exchange for the exposure currency with the reporting currency.  If the actual spot rate that is different from the expected rate, the “hedge” may result in the loss of real cash flows.


Related Discussions:- Explain common methods for controlling translation exposure

What are the market conditions of cost of capital, What are the Market cond...

What are the Market conditions of cost of capital Security may not be readily marketable when investor wants to sell; or even if a continuous demand for security does exist, p

base-case NPV, Ask question #MiniA project under consideration costs $750,...

Ask question #MiniA project under consideration costs $750,000, has a five-year life, and has no salvage value. Depreciation is straight-line to zero. The required return is 17 per

Importance of the government securities markets, Need to Widen and Deepen t...

Need to Widen and Deepen the Government Securities Market The importance of the Government Securities markets can be evaluated from three angles as follows: From the Gove

Spreads, Spreads The difference between two futures price is referred to...

Spreads The difference between two futures price is referred to as ‘spread'. For the same underlying good, if there are two different prices on two different expiration dates, t

How a firm determines the optimal level of current assets, Explain how a fi...

Explain how a firm determines the optimal level of current assets. The best possible level of working capital is determined by finding the amount that balances the need for liq

Operating budget, Operating Budget It is a collection or set of formal ...

Operating Budget It is a collection or set of formal financial documents that details expected expenses and revenues, as like all other expected operating and financial transac

Investment opportunities in capital budgeting process, Briefly examine the ...

Briefly examine the significance of identification of investment opportunities in capital budgeting process

Show the transaction risk, Q. Show the Transaction risk? This is the ri...

Q. Show the Transaction risk? This is the risk occur on short-term foreign currency transactions that the actual income or cost may be different from the income or cost expecte

Partial correlation coefficients , In multiple correlation equations we are...

In multiple correlation equations we are often interested in finding out how much of the variation in the dependent variable is explained by one independent variable if all the oth

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd