Presentation

on
Economic Exposure and Accounting
Exposure

PRESENTED PRESENTED
TO: BY:
Mr. Rajesh Sir
Faizan Malik
Ravi Shankar
ECONOMIC
EXPOSURE
Definition
Exposure to fluctuating exchange rates, affecting
company's earnings, cash flow and foreign
investments.

The risks faced by a company that does

business or holds investments abroad.

includes changes in forex rates or the chance of

foreign countries defaulting on their debt.
Types of Economic
Exposure
Operating
Exposure

Transaction
Exposure
MANAGING OPERATING
EXPOSURE
Product differentiation & repositioning.
Pricing Strategy
Shifting production among plants
Selecting Low-Cost Production Sites
Flexible Sourcing Policy
Diversification of the Market
R&D Efforts and Product
Differentiation
Transaction Exposure
Risk-exchange rate fluctuations will change
the value of a contract before it is settled.
Also called transaction risk.
It is the risk that for-ex rate changes will
adversely affect a cross-currency transaction
before it is settled.
Once a cross-currency contract has been agreed
upon, subsequent fluctuations in exchange rates
can change the value of that contract.
A company that has agreed to but not yet settled
a cross-currency contract has transaction
exposure.
Greater the time, greater the risk
Accounting Exposure
 Definition
Accounting exposure, also called translation
exposure, arises because financial statements of foreign
subsidiaries which are stated in foreign currency must
be restated in the parents reporting currency for the firm
to prepare consolidated financial statements.

The accounting process of translation, involves

converting these foreign subsidiaries financial
statements into US dollar-denominated statements.
 Managing Accounting Exposure
The main technique to minimize translation exposure
is called a balance sheet hedge.
A balance sheet hedge requires an equal amount of
exposed foreign currency assets and liabilities on a
firms consolidated balance sheet.
If this can be achieved for each foreign currency, net
translation exposure will be zero.
If a firm translates by the temporal method, a zero net
exposed position is called monetary balance.
Complete monetary balance cannot be achieved
under the current rate method.
THANKYOU