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Exchange Risk

In: Business and Management

Submitted By ytian32
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EXPOSURE OF FOREIGN EXCHANGE RISK

Foreign Exchange Exposure is the sensitivity of the real domestic currency value of assets, liabilities, or operating incomes to unanticipated changes in exchange rates

EXPOSURE OF FOREIGN EXCHANGE RISK

Foreign Exchange Risk is measured by the variance of the domestic - currency value of assets, liabilities, or operating income that is attributable to unanticipated changes in exchange rates

EXPOSURE OF FOREIGN EXCHANGE RISK
• Three important Facts:
- Changes in the nominal exchange rate are not offset by corresponding changes in prices at home and abroad: there is real exchange rate risk
- Neither the forward rate is successful in forecasting the exchange rate nor are other fundamental variables
- Given the various market imperfections in the real world, hedging exchange rate risk can lead to an increase in the value of the firm

EXPOSURE OF FOREIGN EXCHANGE RISK
• Three types of Exposure:

- Translation or Accounting Exposure
- Transaction or Contractual Exposure
- Operating or Economic Exposure

EXPOSURE OF FOREIGN EXCHANGE RISK
• Three types of Exposure:
Exchange Rate Shock
1. Translation or Accounting
Exposure
∆ in FE rate

∆ in Accounting statements 3. Operating Exposure
∆ in FE rate

2. Transaction Exposure
∆ in FE rate

∆ in outstanding obligations ∆ in future cash flows EXPOSURE OF FOREIGN EXCHANGE RISK

• Translation or Accounting Exposure:

Is the sensitivity of the real domestic currency value of
Assets and Liabilities, appearing in the financial statements to unanticipated changes in exchange rates

EXPOSURE OF FOREIGN EXCHANGE RISK

• Transaction or Contractual Exposure:

Is the sensitivity of the real domestic currency value of
Assets and Liabilities, when assets and liabilities are liquidated with respect to unanticipated changes in

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