--%>
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 : Challenges of friendships How is

    How is friendship differing from other relationships? Explain the challenges of friendships. What are the common expectations for friendships – give an illustration of each. Explain how friendships fluctuate ove

    		•
  • Q : Calculate the Present Value PV Given

    Given that the appropriate discount rate is 10% and that the first of these dividend payments will occur 1 year from now, find the present value of the dividend stream; that is, calculate the PV of D1, D2, and D

    		•
  • Q : Responsibility Accounting Explain the

    Explain the term Responsibility Accounting and types of responsibility centres with example?

    		•
  • Q : Portfolio of Sharemarket SHAREMARKET

     SHAREMARKET ASSIGNMENT SHEET  - Select a share portfolio consisting of one company from each group listed above. The total value of your portfolio should add up to

  • Q : Define the term Accounts Payable

    Accounts Payable: It is an accounting entry which symbolizes an entity's obligation to pay off a short-term debt to its creditors. Accounts payable entry is found on balance sheet beneath the heading current liabilities. Accounts payable are frequentl

    		•
  • Q : Swap broker and swap dealer State the

    State the difference between the swap broker and the swap dealer.

    		•
  • Q : Exchange rate changes decreases risk of

    Would exchange rate changes always raise the risk of the foreign investment? Explain some of the condition under which exchange rate changes can actually decrease the risk of foreign investment.

    		•
  • Q : Assessing risk in the workplace

    Describe the primary steps in assessing risk in the workplace with respect to Health and safety, identify and discuss what actions should be taken to manage or wipe out the risks posed?

    		•
  • Q : Functions of Bank Write some of the

    Write some of the functions of Bank?

    		•
  • Q : Lessons from experiences of Novo State

    State some of the factors which motivated Novo Industries to seek the U.S. listing of its stock. Explain about the lessons which may be derived from experiences of Novo?

    		•