Measuring Exposure to Exchange Rate Fluctuations

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

According to Investopedia, transaction exposure is defined as the risk faced by companies in international trade, that currency exchange rates will change after the companies have already entered into financial obligations. Such exposure to fluctuating exchange rates can lead to major losses for the firm. With this being said, Universal Circuit’s transaction risk is low because its sales invoices are in US dollars and on average, the affiliates pay the Irish branch in fifty five days.

Currency exposures assume many forms: they can be assets or liabilities; current or committed; contracted or merely forecast; they can be for trade, investment or balance sheet purposes. Cases of currency exposure can emerge at any point along the value chain, with various repercussions. Each requires a transfer of funds, and for each the rate of exchange is uncertain. Examples of different types of currency exposures are presented below.

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

Exchange rate gains or losses are brought to account in determining the net profit or loss in the period in which they arise, as are exchange gains or losses relating to cross currency swap transactions on monetary items. Exchange differences relating to hedges of specific transactions in respect of the cost of inventories or other assets, to the extent that they occur before the date of receipt, are deferred and included in the measurement of the transaction. Exchange differences relating to other hedge transactions are brought to account in determining the net profit or loss in the period in which they arise. Foreign controlled entities are considered self-sustaining. Assets and liabilities are translated by applying the rate ruling at balance date and revenue and expense items are translated at the average rate calculated for the period. Exchange rate differences are taken to the foreign currency translation reserve.

6. Whether transactions with the reporting entity are high or low proportion of the foreign activities

3. How are multi-currency cash flows, currency risk and political risk being taken into account in our valuation model?

* 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.

Given the nature of its business, Jaguar is faced with three types of exchange rate exposure (1) Transaction, (2) Translation and (3) Economic . Transaction exposures arise whenever the firm commits (or is contractually obligated) to make or receive a payment at a future date denominated in a foreign currency. Translation exposures arise from accounting based changes in consolidated financial statements caused by a change in exchange rates. In this case we primarily focus on the Economic exposure -also known as Operating exposure or Competitive exposure- of Jaguar.

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

1) What are Aspen Technology’s main exchange rate exposures? How does Aspen Tech’s business strategy give rise to these exposures as well as to the firm’s financing need?

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

• Financial management effort: To minimize the risk of exchange-rate fluctuation and transactions processes of export activity the financial management needs more capacity to cope the major effort

1) Merton Electronics is subject to transaction exposure. Transaction exposure is the gains or losses realized from the settlement of specific transactions that are denominated in a foreign currency. There are two main types of transaction exposure: 1) Purchasing or selling on credit goods denominated in a foreign currency 2) Borrowing or lending funds when repayments is going to be made in foreign currency. In respects to Merton’s Yen payments they are subject to transaction exposure. Merton imports a majority of its products from Japan. This results in payments due to suppliers that are denominated in Yen. Merton has locked in outstanding transactions with Fuji and Goldstone that would be