Nature Of Exchange Rate Risk

Nature of Exchange Rate Risk Exposure: refers to degree to which a company is affected by exchange rate changes. There are three different kinds of exposure to exchange risk: Transaction or Conversion Exposure Translation or Accounting Exposure Economic Exposure.

"Kindness in words creates confidence Kindness in thinking creates profoundness Kindness in giving creates love."

Measuring Exposure 

Transaction Exposure refers to the possibility of increasing exchange gains or losses, upon settlement at a future date, on transactions already entered into and denominated in a foreign currency.



Translation Exposure refers to accounting treatment of changes in exchange rates.

What you do off the job is determining factor In how far you will go on the job

Methods of translation: I. II. III. IV.



Monetary / Non-monetary method Temporal Method Current / Non-current Method Current rate method Economic exposure is the change in value of a company that accompanies an unanticipated change in exchange rates.

"Even as water carves monuments of stone, so do our thoughts shape our character .

Management of exposure  

Either to maximize exchange gains (aggressive). Or to minimize exchange losses. (defensive)

Techniques Internal Techniques

External Techniques

"After I'm dead I'd rather have people ask why I have no monument than why I have one

Internal Techniques  

4) 5)

7)

Netting Matching Natural Matching  Parallel Matching Leasing and Lagging Pricing Policies Price variation Currency-of-invoicing policy. Assets and Liability Management

"In matters of style swim with the current; In matters of principle, stand like a rock."

External Techniques 1) 2) 3) 4) 5)

Forward exchange contract. Short-term Borrowings. Discounting Factoring Government Exchange Risk Guaratee.

"Nearly all men can stand adversity, but if you want to test a man’s character, give him power."