Explain common methods for controlling translation exposure, Financial Management

Assignment Help:

It is, usually, not possible to totally eliminate both translation exposure and transaction exposure.  In few cases, the elimination of one exposure will as well eliminate the other.  But in another cases, the elimination of one exposure in fact makes the other.  Discuss which exposure might be viewed like the most significant to effectively manage, if a conflict between controlling both takes place. As well, discuss and critique the common techniques for controlling translation exposure.

Answer:  As it is, usually, not possible to completely eliminate both transaction and translation exposure, we suggest that transaction exposure be given first priority as it includes real cash flows.  The translation procedure, on-the-other hand, has no direct influence on reporting currency cash flows, and will just have a realizable effect on net investment upon the sale or liquidation of the assets.

There are two general methods for controlling translation exposure:  a balance sheet hedge and a derivatives hedge. The balance sheet hedge includes equating the amount of exposed assets in an exposure currency along with the exposed liabilities in that currency, thus the net exposure is zero. So when an exposure currency exchange rate changes versus the reporting currency, the change in assets will offset the change in liabilities. To form a balance sheet hedge, one time transaction exposure has been controlled, frequently means creating new transaction exposure. This is not wise as real cash flow losses can result.  A derivatives hedge is not actually a hedge, but rather a speculative position, as the size of the “hedge” is based upon the future expected spot rate of exchange for the exposure currency with the reporting currency.  If the actual spot rate that is different from the expected rate, the “hedge” may result in the loss of real cash flows.


Related Discussions:- Explain common methods for controlling translation exposure

Measure of central tendency, One of the most important objectiv...

One of the most important objectives of statistical analysis is to get one single value that describes the characteristic of the entire mass of unwieldy

Brigham, how do legal consideration affect a firms credit policy

how do legal consideration affect a firms credit policy

Time value of money, Can you help me out on the Time value of money????? ...

Can you help me out on the Time value of money????? I need urgent help on this topic...

Global sector indixes, Global Sector Indixes Morgan Stanley Capital Int...

Global Sector Indixes Morgan Stanley Capital International (MSCI) measures the International and National performance. It launched All Country Sectors on January 30, 2001. MSCI

Budgeting, Budgeting: All business owners should recognise and understa...

Budgeting: All business owners should recognise and understand the importance of preparing and maintaining a financial budget for their business. Budgets are an essential fi

Which is lower for company cost of debt or cost of quality, Which is lower ...

Which is lower for a given company:  the cost of debt or the cost of equity?  Explain.  Ignore taxes in your answer. The cost of debt is all the time less than the cost of equi

Capital budgeting, #how to calculate initial investment cash flows ..

#how to calculate initial investment cash flows ..

Explain net present value method, Q. Explain Net Present Value Method? ...

Q. Explain Net Present Value Method? Net Present Value (NPV) Method: - This process measures the Present value of returns per rupee invested. In this method present value of

What is a sunk cost, What is a sunk cost?  Is it relevant when evaluating a...

What is a sunk cost?  Is it relevant when evaluating a proposed capital budgeting project?  Explain. A sunk cost is a cash flow that has already takes placed, or that will take

Time Value of Money, Two years ago, Randburg Ltd needed to accumulate a tot...

Two years ago, Randburg Ltd needed to accumulate a total of R250000 by the end of 5 years to acquire new imported machinery. To do so Randburg Ltd makes quarterly-annual deposits i

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd