INTERNATIONAL FINANCIAL MANAGEMENT (IFM)
QUIZ 3
Name: Sarab Vikas
48
1. Differentiate between Transaction exposure and Translation exposure?
Ans
Transaction Exposure
 It is inherent in all foreign
currency denominated
contractual obligations.
 It pertains to actual
transactions taking place in
business involving foreign
currency.
 Transaction exposure results
in realized gain or losses
 The transactions may relate
to cross-border trade in terms
of import or export of goods,
the borrowing or lending in
foreign currencies, domestic
purchases and sales of goods
& services, the purchase of
assets or takeover of the
liability involving foreign
currency.
 In case of loss, the cash flows
reduce and hence you get tax
benefit on the loss and vice
versa
 Transaction exposure
measures gain or loss to the
cash flow on account of forex
movements.
Roll No: B12-
Translation Exposure
 It relates to the change in
accounting income and
balance sheet statements
caused by the changes in
exchange rates. (Accounting
Exposure)
 Carried out on account of
reporting the shareholders.
 Translation exposure results
in book gain or losses
 Translation exposure results
from the need to translate
foreign currency assets or
liabilities into the local
currency at the time of
finalizing accounts.
 There is no tax exemption or
benefit available on losses due
to translation exposure
 Translation exposure is a
measurement concept rather
than dealing with actual cash
flow impact on account of
forex. 
2) What hedging strategy do you suggest to Indian importer facing forex
exposure / risk? Why that strategy?
Ans: In in the global financial markets, hedging is used in every asset class
to mitigate losses. This can be utilised by anyone, whether it is an individual
or corporates, to overcome the negative impact of price volatility.
Hedging Strategy: Entering foreign currency transactions whose cash
flows exactly offset the cash flows of the transaction exposure. It can
also include forward contracts, price adjustment clauses, currency
options and borrowing or lending in the foreign currency, Money
Market Hedge, risk shifting and pricing decisions.

For the corporates in which the business activity is dependent on import and
export of commodities, there is an automatic exposure to foreign exchange
and, hence, the need for hedging is higher. In the current context, since the
world markets are interlinked, they eventually affect and impact the
movement of currencies.
The parties to the foreign exchange generally face three types of exposures.
a. Transaction Exposure
b. Translation Exposure
c. Economic Exposure

Three forex hedging strategies

Simple forex hedging strategy

A simple forex hedging strategy involves opening the opposing
position to a current trade. For example, if you already had a long
position on a currency pair, you might choose to open a short position
on the same currency pair – this is known as a direct hedge.

Multiple currencies hedging strategy

Another common FX hedging strategy involves selecting two currency
pairs that are positively correlated, such as GBP/USD and EUR/USD,
and then taking positions on both pairs but in the opposite direction.

Forex options hedging strategy

A currency option gives the holder the right, but not the obligation, to
exchange a currency pair at a given price before a set time of expiry.
 Options are extremely popular hedging tools, as they give you the chance to
reduce your exposure while only paying for the cost of the option.

Example: Suppose an oil importer wants to purchase oil worth $1,00,000

and places his order on 15 March 2013, with the delivery date being three
months away. At the time of placing the contract in the spot market, one US
dollar is worth, say, Rs 54.50. However, suppose the Indian rupee
depreciates to Rs 57 per dollar when the payment is due in June 2013, the
value of the payment for the importer goes up to Rs 57,00,000 rather than Rs
54,50,000.
3) Differentiate between FDI and FII?
Ans
FDI
 When any foreign organisation or, institution of one nation makes an investment in
organisation or, institution of another country then this is called as Foreign Di
Investment.
 FDI is of long-term capital
 FDI flows into primary market
 FDI is eligible for profits of the company.
 FDI helps in developing infrastructure, technology, resources and plays a key rol
the economic development of the country.
 Investments in physical assets.
 Entry and exit are difficult.

4). Distinguish between Greenfield project and Brownfield project under

FDI. Furnish examples.
Ans
Greenfield project

 Greenfield investment is investment in new plants.

 It is establishing new production capacity by an investor or company.
 It refers to investment in a manufacturing, office, or other physical company-rel
structure or group of structures in an area where no previous facilities exist.
 Example: In 2006, Hyundai Motor Company received approval to make around $1 bil
Euros in a major greenfield investment in Novice in the Czech Republic. The autom
established a new manufacturing plant that employed up to 3,000 individuals in its first
of operation. The Czech Government provided tax relief and subsidies to prompt
greenfield investment in hopes of boosting the country’s economy and lowering
unemployment rate.

5). Illustrate any one of the international projects which has suffered from
Expropriation and other political risk in any country.
Ans Expropriation and confiscation mean the taking of private property by
a government for public use.
Example:
 Coal Industry – In 1973, the government of India passed the Coal Mines
Nationalization, Act 1973 which ensured that coal mining operations in
India could be carried on only by a government managed, owned or
controlled company.

 Banking Sector – In 1969, under provisions of the Banking Companies

(Acquisition and transfer of undertakings) Act, 1970, the government of
India nationalized 14 of the largest Indian banks, having over 75% of the
deposits of the county. Subsequently, in 1980 a few more commercial
banks were nationalised, and this ensured that government of India
controlled 90% of the banks in India.

6). Explain Leading and Lagging technique in managing international cash

flows of MNCs.
Ans: Leading and lagging involves an adjustment in the timing of the
payment or disbursement to reflect expectations about the future currency
movements. Leading means fastening (paying or receiving early) and
lagging means delaying (paying or receiving late).
Cash Management in an MNC is primarily aimed at minimizing the overall
cash requirements of the firm as a whole without adversely affecting the
smooth functioning of the company and each affiliate, minimizing the
currency exposure risk, minimizing political risk, minimizing the
transaction costs and taking full advantage of the economies of scale as
also to avail of the benefit of superior knowledge of market forces.
 The objectives conflict with each other leading to increased complexity of
the cash management. For instance, minimization of the political risk
involves conversion of all receipts in foreign currencies in the currency of
the home country. minimization of transaction costs involved in currency
conversions calls for holding cash balances in the currency in which they
are received.
It refers to the adjustment of the times of payments that are made in foreign
currencies. Leading is the payment of an obligation before due date while
lagging is delaying the payment of an obligation past due date. The purpose
of these techniques is for the company to take advantage of expected
devaluation or revaluation of the appropriate currencies. Lead and lag
payments are particularly useful when forward contracts are not possible.
On the other hand, in case of lagging payment to an independent third
party, there is always the possibility of upsetting the trading relationship,
with possible loss of credit facilities or having prices increased to
compensate for the delay in the receipt of funds. There is also the
possibility of damage to the lagging company’s external credit rating.

7). In the wake of Covid 19 (Corona) outbreak, people are watching movies
on Netflix and Amazon Prime, as they cannot go to theatres. What kind of
exposure film producing companies are facing?
Ans The 2019–20 coronavirus pandemic has had a substantial impact on
the film industry, mirroring its impacts across all arts sectors. Across the
world and to varying degrees, cinemas and movie theatres have been
closed, festivals have been cancelled or postponed, and film releases have
been moved to future dates or delayed indefinitely. As cinemas and movie
theatres closed, the global box office dropped by billions of dollars,
streaming became more popular, and the stock of film exhibitors dropped
dramatically. The film producing companies are selling the digital rights
for the Netflix and Amazon Prime to cover up their risk positions.
Many blockbusters originally scheduled to be released between March and
November were postponed or cancelled around the world, with film
productions also halted.
The Chinese film industry had lost US$2 billion by March 2020, having
closed all its cinemas during the Lunar New Year period that sustains the
industry across Asia. The United States saw its lowest box office weekend
since 1998 between March 13–15. After this, the US box office stopped
reporting until June.