--%>
Assignment Help - homework help

Controlling the translation exposure

It is, normally, not possible to fully remove both the translation exposure and transaction exposure.  In some cases, eradication of one exposure will also eliminate the other.  However in other cases, removal of one exposure really creates the other.  Illustrate which exposure might be viewed as the most significant to efficiently manage, in case conflict between controlling both arises.  Also, critique and discuss the common methods in order to control the translation exposure.

E

Expert

Verified

As it is, normally, not possible to entirely remove both translation and transaction exposure, we suggest that transaction exposure should be given the first priority as it includes real cash flows. Translation process, otherwise, has no direct effect on reporting currency cash flows, and will have a realizable effect on the net investment on the sale or liquidation of assets.

There exist two methods in order to control the translation exposure:  balance sheet and derivatives hedge.  Balance sheet hedge includes equating the amount of exposed assets in an exposure currency along with exposed liabilities in that currency, so net exposure is zero.  Therefore, when an exposure currency exchange rate changes versus reporting currency, change in assets will offset change in the liabilities. For creating the balance sheet hedge, as the transaction exposure has been controlled, generally means creation of new transaction exposure.  It is not wise as real cash flow losses can result. Derivatives hedge is not really a hedge, instead a speculative position, as size of ‘hedge’ is based on future expected spot rate of exchange for the exposure currency with the reporting currency.  In case actual spot rate differs from the expected rate, ‘hedge’ may result in loss of real cash flows.

   Related Questions in Financial Accounting

  • Q : Definition of Ledger What is the

    What is the Definition of Ledger in terms of Accountancy?

    		•
  • Q : Asian firms building the production

    Since NAFTA was developed, several Asian firms particularly those from the Korea and Japan has made the extensive investments in the Mexico. Why do you think these Asian firms decided to build the production facilities in the Mexico?

    		•
  • Q : Prepare the journal entry to record the

    On December 31, 20x1, the Kat Co. purchase a group of four assets for a total cost of $1,000,000. An independent appraiser assesses the fair value of each asset asfollows: Asset Fair Value Land $350,000 Building 600,000 Equipment 200,000 Fixtures 150,000 Prepare the journal entry t

    		•
  • Q : Services offered by international banks

    Discuss some of services which international banks offer to their customers and market place.

    		•
  • Q : Accounting estimate Normal 0 false

    Normal 0

  • Q : Free international trade in goods and

    Explain, how economic well-being of a country is improved through free international trade in the goods and services?

    		•
  • Q : Creation of North American Trade

    Mr. Ross Perot, former Presidential candidate of the Reform Party, that is the third political party in the United States, had strongly protested in the creation of North American Trade Agreement (NAFTA), however, which was inaugurated in the year 1994, due to fear of

    		•
  • Q : Define Factitious Assets Factitious

    Factitious Assets: When any asset that has no market price which asset is termed as factitious assets. This is illustrated as expenditures of capital expenditure. The main illustration of such factitious assets is: Preliminary expenses, discount on is

    		•
  • Q : Currency options and forward contract

    State some of the advantages of currency options contract as a hedging tool as compared with the forward contract?

    		•
  • Q : Objective Questions on Sociology 1)

    1) Which large European city declined significantly in population over the past century? A) Paris B) London C) Rome D) Madrid 2) The industrial city was characterized b A) decentralization B) corporate growt

    		•