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 is return oncapital employed - performance ratios, What is Performanc...

What is Performance ratios ROCE Return oncapital employed (ROCE)= (Profit before interest and tax (PBIT) / Capital employed) * 100% ROCE measures profitability and illu

Determine have mergers affected competition, Have mergers affected competit...

Have mergers affected competition? A: Federal Reserve data depict that measured on the local level, where competition occurs; markets have in fact experienced more banking comp

Walter''s model, 3. The following information are related to Sun Ltd. Paid...

3. The following information are related to Sun Ltd. Paid-up equity capital ` 10,00,000 Earnings of the company ` 1,00,000 Dividend paid ` 80,000 Price - Earning rat

Risk of default influence the rate of interest, Q. Risk of default influenc...

Q. Risk of default influence the rate of interest? The bank offering the loan to Blin will make an assessment of the risk that the company might default on its loan commitments

Corporate debt, which critically examines the benefits and risks to a compa...

which critically examines the benefits and risks to a company, of incorporating corporate debt into a portfolio of equity and debt.

Significant performance indicators, Significant Performance Indicators ...

Significant Performance Indicators   Following are the most commonly used performance indicators used to assess the financial, and general health of any company:   Gro

Obtain a market arbitrage position, (a) One could obtain a market arbitrag...

(a) One could obtain a market arbitrage position as follows: buy Honeywell shares as well as sell General Electric shares. If the merger gets place the Honeywell shares will conve

Accounting pricniple, The salaries paid in 2004 is Rs.500000; salaries outs...

The salaries paid in 2004 is Rs.500000; salaries outstanding Rs.20000; salaries paid in advance for 2001 is Rs.30000. What is the actual salary expenditure for 2004?

Accounts receivable are sometimes not collected, Accounts receivable are so...

Accounts receivable are sometimes not collected.Why do companies extend trade credit when they could insist on cash for all sales? Extending trade credit almost for all the tim

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