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Foreign Exchange Risk Mitigation

Techniques/Measuring Foreign Exchange
Exposure
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Unit 2.1-Foreign Introduction | Rates of Exchange | Market Drivers | Measuring FX
Exchange Risk Exposure | Business Needs for Foreign Currency | Foreign Exchange
Mitigation Trading | Common Instruments to Offset Risk | Summary | Resources |
Techniques Activities | Assessment
• Return to Trade Finance Module 2: Risk Mitigation Techniques

Contents
[hide]
• 1 Measuring Foreign Exchange Exposure
○ 1.1 Transaction Exposure
○ 1.2 Translation Exposure
○ 1.3 Economic Exposure

[edit] Measuring Foreign Exchange Exposure

[edit] Transaction Exposure
Transactions in the form of purchase contracts or agreements denominated in a foreign
currency but not yet settled create transaction exposure. The fluctuation of the currency will
have an impact on the value until the transaction is completed. The value of an unsettled
export receivable or an import payable is just one example. There are multiple hedging
techniques to help the investor minimize his risk, including:
• forward contracts
• futures contracts
• use of a money market hedge
• contractual risk sharing
• pricing adjustments based on forward rates
• foreign currency accounts
• foreign currency options
[edit] Translation Exposure
The revaluation of all foreign-denominated assets and liabilities often referred to as transfer
pricing is usually considered “paper” gains or losses. The conversion of an asset by selling it
and converting the proceeds to the local currency would create a realized gain or loss. This
form of exposure is created when financial statements are prepared and converted to the local
currency of the owner or investor. This form of exposure is considered an indication of
potential gains or losses.
[edit] Economic Exposure
The evaluation of foreign governments from an economic standpoint determines whether a
translation exposure could be realized. The projected stability of a country, both politically
and economically, impacts future cash flows and can adversely impact the profitability of an
organization. Strategic planning for operations must include economic exposure.
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Category: International Business
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