C09-Transaction-Exposure.ppt

Chapter9TransactionExposureLearningObjectivesDistinguishbetweenthethreemajorforeignexchangeexposuresexperiencedbyfirmsAnalyzetheprosandconsofhedgingforeignexchangetransactionexposureIdentifyforeignexchangetransactionexposureIdentifythealternativesavailabletoafirmformanagingalargeandsignificanttransactionexposure9-*ForeignExchangeExposureForeignexchangeexposureisameasureofthepotentialforafirm’cashflow,andmarketvaluetochangebecauseofachangeinexchangeratesTheprofits,essorfailureofafirmTypesofforeignexchangeexposureTransactionExposure–measureschangesinthevalueofoutstandingfinancialobligationsincurredpriortoachangeinexchangeratesbutnotduetobesettleduntilaftertheexchangeratechangesOperatingExposure–alsocalledeconomicexposure,measuresthechangeinthepresentvalueofthefirmresultingfromanychangeinexpectedfutureoperatingcashflowscTranslationExposure–ountingexposure,ountingderivedchangesinowner’urbecauseoftheneedto“translate”financialstatementsofforeignsubsidiariesintoasinglereportingcurrencyforconsolidatedfinancialstatementscausedbyanunexpectedchangeinexchangerates9-*,Operating,andTranslationForeignExchangeExposure9-*-*1))OperatingB)TransactionC)TranslationD)EconomicAnswer:B9-*MeasurementofTransactionExposureTransactionexposure:PurchasingorsellingoncreditgoodsorserviceswhenpricesarestatedinforeigncurrenciesBorrowingorlendingfundswhenrepaymentistobemadeinaforeigncurrencyBeingapartytoanunperformedforwardcontractandOtherwiseacquiringassetsorincurringliabilitiesdenominatedinforeigncurrencies9-*TransactionExposure:ounttoaBelgianbuyerfor€1,800,000payablein60daysFurtherassumethatthespotrateis$/€andTridentexpectstoexchangetheeurosfor€1,800,000x$/€=$2,160,000whenpaymentisreceivedTransactionexposurearisesbecauseoftheriskthatTridentwillsomethi