Balance Sheet Hedge

This case shows us that apart from transaction, translation and economic exposure to currency risk, firms also have the very real strategic impact on their competitive position from competitive exposure. Apart from GM’s exposure to the yen which is reflected in their financial statements, their competitive position vis-à-vis Japanese manufacturers is affected by a potentially declining yen. This is because a declining yen reduces the Japanese manufacturers’ $ cost, enabling them to pass on some of the benefit to US customers and thus taking some of GM’s market share. This will impact GM’s top and bottom line. However, GM has a difficult decision regarding managing this risk.

The exchange rates risk that is associated with economic, transaction, and translation exposure in Indian market. From the analysis, anticipate the fluctuations that seem to occur in the next 24 months

Global business today is subject to various kinds of risks. One risk that global business needs to handle is the foreign exchange risk. Foreign exchange risk is the risk when companies face a potential gain or loss due to the fluctuation of an exchange rate change. Companies can be subject to a significant financial loss, even with a small change in the exchange rate. Thus, the primary purpose of managing foreign exchange risk is to mitigate potential currency losses. There are at least three strategies companies use to manage their foreign exchange risk. They are forward contracts, currency swaps and “natural” hedges. Companies like Airbus, Tohoku Electric Power Company and Toyota utilized these strategies to reduce potential currency losses.

Exchange rate risk, also called as ‘currency risk’ is the risk arising from currency fluctuations. Volatile exchange rates can reduce cost and productivity advantages gained over years of hard work. Firms exposed to international economy face this risk. When a firm has already committed to a foreign currency denominated transaction, the firm is exposed to a exchange rate risk. The firm will incur a

2.There are three different types of foreign exchange risk: transaction exposure, economic exposure, and translation exposure. Transaction exposure refers to the extent to which transactions are liable to be affected by the exchange rate at a given moment. Because of the constant fluctuations of the exchange rate, the profits garnered from a given transaction can be greatly affected. Economic exposure refers to the tendency that a change in exchange rate can have on a party's cash supply and earnings. This has similar consequences to those of transaction exposure, except that it is not directly related to a specific transaction. Translation exposure relates to the impact that changes in exchange rates can have on the financial statements of a country; they differ from the other types of foreign exchange risk in that they have less relation to transactions.

The biggest threat for the company can be the currency fluctuation, that means not stability in their profits , so as a result of fluctuation there can be the rising of interest rates and an increase of the company’s income.

General Motors Corporation, the world’s largest automaker, has an extensive global outreach, which places the firm in competition with automakers worldwide, and subjects itself to significant exchange rate exposure. In particular, despite most of its revenues and production being derived from North America, depreciating yen rates pose problems for the firm indirectly through economic exposure. While GM possesses ‘passive’ hedging strategies for balance sheet and income statement exposures, management has not yet quantified or recognized solutions to possible losses from the indirect competitive exposure it now shared with Japanese automakers in the U.S import

Foreign exchange risk consists of three main types of exposures. First, transaction exposure is when a firm has a contractual obligation under which it supposed to receive or pay a certain amount in a currency that is different than its home currency. Transaction exposure has an effect of the firm’s income statement because the accounts payables or receivables can be affected by currency exchange rates. Second foreign exchange exposure is the translation which impacts the balance sheet of the firm. It occurs when consolidating financial statements of foreign units into a company’s home currency. The third type of foreign exchange exposure is the economic which influences a firm’s cash flows when exchange rates change. This type of exposure can impact assets, liabilities, or any type of anticipated foreign currency cash exchange.

* Currency exposure is the extent to which the future cash flows of an enterprise, arising from domestic and foreign currency denominated transactions involving assets and liabilities, and generating revenues and expenses, are susceptible to variations in foreign currency exchange rates.

Economic exposure is the change in expected cash flows arising because of an unexpected change in exchange rates. Aside from existing obligations of the firm which will be settled in foreign currencies at

Risk is an inherent aspect of every business activity and its effective management can determine the success or failure of a company. Companies dealing with foreign currencies are at a risk of significant losses caused by fluctuations in the exchange rates. The American Institute for Foreign Study (AIFS) operates in more than one currency and this exposes it to currency risks. The company incurs its expenses in dollars but receives its revenue in other currencies and, therefore, adverse fluctuations might result in huge losses to the company. The company employs a hedging strategy as its core approach to risk management. Hedging involves entering into contracts that lock up exchange rates in future so that a company obtains its revenues or makes payments in constant exchange rates despite fluctuations. By hedging its currency risks, AIFS is able to avoid losses that result from huge fluctuations in currency exchange rates. However, the company has to pay a commission for the hedging as compensation to entities that assume this risk. AIFS has employed two primary methods of hedging: currency forward contracts and currency options. Forward contracts are agreements that give an entity a right to exchange specified amounts of one currency for another at pre-determined exchange rates in a future date. On the other hand, options give the holder a right but not an obligation to engage in

Exhibit 7 from the case study describes the currency development in medium term of the GBP and EURO against the dollar. We can observe that the currencies are exposed to high volatility, which means the company may register greater risk

Miller, K. D., & Reuer, J. J. (1998). Firm Strategy and Economic Exposure to Foreign Exchange Rate Movements. Journal of International Business Studies, 29(3), 493-513.

Aspen has become a public company with more risk adverse investors who want to invest in the core business of the firm and not assume any foreign exchange risk. Foreign exchange risk is a core risk to Aspen’s business because they have many customers outside of the United States. We believe that transferring this risk to the customers would limit Aspen’s growth on the foreign markets: Aspen should keep its current marketing strategy, which includes credit installment payments and payments in local currencies for Japan, the UK and Germany. The current risk management program hurts the company because it doesnot consider Aspen’s expenses abroad that balance sales exposures to currency fluctuations. We then recommend that

Items presented in the financial statements of each of the Group`s entities are measured using the functional currency. IPL’s presentation currency is the Australian dollar, the currency used to present its consolidated financial statements. Foreign currency transactions are translated into the functional currency at the exchange rate on the day the transaction occurs. Foreign exchange gains and losses are recognised in the statement of comprehensive income, except when they are `deferred in equity as qualifying cash flow hedges`. These have been calculated following the AASB 121 `The effects of changes in Foreign exchange rates` and AASB 139 `Financial instruments – recognition and measurement`.