Foreign Exchange Exposure

and
Management
MBA | SEM
IF CEC (4549221)
Prepared by:
Dhruvkumar Vanza (217370592010)
Vrajeshwari Yadav (217370592063)
FOREX - A HIGHLY VOLATILE MARKET
What Is Foreign
Exchange Exposure?

• refers to the risk of foreign

exchange rates that change
quickly and frequently.
• When this happens, it can
greatly affect financial
transactions with foreign
currency rather than the
domestic currency of a
company.
 The term foreign exchange exposure is
relevant for the companies involved in
import or export of goods or services, or
having transactions denominated in foreign
currency.
Two misconceptions:
• "Only firms that have foreign operations are exposed to the
exchange rate"
• "If a firm denominates all its sales and purchases in terms of
its own currency, there is no exposure”

• But competition, or potential competition, from foreign

firms and potential later exports or imports prices of local
purchases may depend on future exchange rates.
 TYPES

Transaction/ Translation/ Economic/

Accounting Contractual Operating
Exposure Exposure Exposure
1.
2. Transaction
Exposure
Implies
Risks
From
Changes
in
Forex
Rates

Occurs in Impacts Is managed

international transaction using
business value hedging
3. Economic exposure
• Economic Exposures are based on the extent to which the value of
the firm - as measured by the present value of its expected cash
flows - will change when exchange rate changes.

• Affects a company’s earnings, cash flow and foreign investments.

• Difficult to identify, quantify, and hedge since this exposure could be

to a currency in which your company has no physical activity.
EXAMPLE
• you have a dollar cost base and sell all of your finished goods in the
US
• your main competitor has a Peso cost base
• your competitiveness in the US markets will be influenced by the Peso
/US dollar exchange rate
 Managing Currency Risk
• Movements in foreign currencies can have a significant
impact on corporate performance
I.g. Cash Flows, Earnings, Balance Sheet
• Management allows companies to focus on core business,
not foreign exchange
• Effective management of currency risk can be a source of
competitive advantage
THANK YOU.