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

Accounting pricniple, The salaries paid in 2004 is Rs.500000; salaries outs...

The salaries paid in 2004 is Rs.500000; salaries outstanding Rs.20000; salaries paid in advance for 2001 is Rs.30000. What is the actual salary expenditure for 2004?

Explain dual currency bond, Explain Dual Currency Bond A dual currency ...

Explain Dual Currency Bond A dual currency bond is a straight fixed-rate bond that is issued in one currency and pays coupon interest in that similar currency.  At maturity, th

Analysis of capitalization, You must analyze how the company is financed th...

You must analyze how the company is financed through equity and debt financing. You will discuss the level of leverage and how it compares to similar companies in the Industry.

Disadvantage or redundancy of excessive working capital, Q. Disadvantage or...

Q. Disadvantage or redundancy of excessive working capital? Excessive working capital means idle funds which earns no profit for the business operation it should have nighters

Define the modigliani and miller theory of dividends, What is the Modiglian...

What is the Modigliani and Miller theory of dividends?  Explain. The Modigliani-Miller theory of dividends states that dividend theory is not relevant.  They state that it is the

Characteristics of hedge funds, Characteristics of Hedge Funds Hedge Fu...

Characteristics of Hedge Funds Hedge Funds are commonly referred to as "absolute return strategies", which means that many are designed to seek positive returns in most market

Accrual bond, It is a bond that does not give periodic interest payments. I...

It is a bond that does not give periodic interest payments. In spite of that, interest is added to the principal balance of the bond and is either paid at maturity or, at some poin

Swiss variable rate mortgage, A Swiss Variable Rate Mortgage (S...

A Swiss Variable Rate Mortgage (SVRM) is a version of ARM which carries a coupon rate that a bank can change any time giving a notice of three m

Define market value in modigliani miller equation, Define in the Modigliani...

Define in the Modigliani-Miller equation (MM equation), why is the market value of the levered firm greater as compared to the market value of an equivalent unlevered firm? Th

Operating cycle, applicability of an operating cycle in a vegetable growing...

applicability of an operating cycle in a vegetable growing business

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