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

Break even period, It is also important to compare the returns from t...

It is also important to compare the returns from the equity stock and the bond to determine the profitability of both investments. We have seen above that the div

Review of financial research report, This assignment is an analysis of a US...

This assignment is an analysis of a US publicly-traded company; its common stock could be a prospective investment.  The report is due in Week 10, in needs to be at least 5 pages,

Capital investment decision-making process , Identify and explain the key s...

Identify and explain the key stages in the capital investment decision-making process and the role of investment appraisal in this process.

Cross-sector analysis, Cross-Sector Analysis: The growth of a country d...

Cross-Sector Analysis: The growth of a country depends upon how fast a country can adapt to deregulation and internationalization. Deregulation and internationalization put com

George thomas, which type of financing is appropriate to each firm

which type of financing is appropriate to each firm

Determine about the entity level - inherent risk, At entity level - Inheren...

At entity level - Inherent risk Integrity of management. Management's experience and knowledge Over reliance on key customers. Unusual pressures on management

Management of pension funds, Management of pension funds Employees Prov...

Management of pension funds Employees Provident Fund Organization (EPFO) is the major organization which deals with the pension system in India. The Employees' Provident Fund O

Why auditors need to attain audit evidence, Why auditors need to attain aud...

Why auditors need to attain audit evidence When significant fluctuations/unexpected relationshipsare identified which are inconsistent with  other  relevant  information  or  t

Swing traders, Swing Traders Swing trading is more or less similar to d...

Swing Traders Swing trading is more or less similar to day trading except that swing traders will normally have a longer holding period during a working day. Swing traders also

Working Capital Management, The management of Nelson plc wish to estimate t...

The management of Nelson plc wish to estimate their firm’s equity beta. Nelson has had a stock market quotation for only two months and the financial management feels that it would

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