Currency Exposure

Question 1

What are the three types of currency exposure

Answer 1

Transaction exposure
Translation exposure
Economic exposure

Question 2

What is the definition and an example of transaction exposure

Answer 2

Arises from actual business transactions denominated in a foreign such as importing/ exporting goods or receiving/ paying foreign currency invoices

Example: a uk company sells goods to a Japanese client for 100 million yen with payment due in three months, any change in exchange rates in this period impacts the companies receipt

Question 3

What is the definition and an example of translation exposure

Answer 3

Definition: arises when a company consolidates its foreign subsidiaries financial statements into its home currency. Exchange rates fluctuations can affect the reported value of liabilities assets etc

Example: a uk based multinational company owns a subsidiary in the US if the USD weakens against the GBP the translated value of the us subsidarys assets and earnings in the parent companies accounts will decrease

Question 4

What is the definition and an example of economic exposure

Answer 4

Definition: refers to the long term risk to a companies market value and competitive position due to exchange rate changes. It affects future cash flows and pricing strategies

Example: a uk car manufacturer faces increased competition from a German rival if the GBP strengthens against the EUR making the UK cars more expensive in export markets while the German car becomes cheaper