summer 2018 exam 2 1Protected this PC Sign in ences Mailings

summer 2018 exam 2 1-Protected this PC Sign in ences Mailings Review View Add-ins Currency risk Identify the three types of currency risk and explain what actions of a company cause the company to be subject to each type of risk 0

Solution

Three tupes of currency risks are:
1. Transaction Exposure
2. Translation Exposure
3. Economic Exposure

Three types of currency risks are:
1. Transaction Exposure
2.Translation Exposure
3. Economic Exposure

1. Transaction Exposure:
This exposure occurs due to payments for imports , payments of debt obligations by business entities to foreign companies. These risks are for short term and medium term.
Companies importing from countries where foreign exchange fluctuates a lot can cause this problem or issuing bonds or taking loans from foreign countries can cause this risk. E.g. Ford Motors import auto parts from Europe or China may face this type of problem.

2. Translation Exposure:
This type of exposure affects the balance sheets of the form if they have subsidiaries in foreign countries. The assets and liabilities will be evaluated on the basis of domestic currency. The balance sheet can be artificially deflated if foreign exchange in unfavourable.

Suzuki motors has it subsidiaries in India, European countries. So their consolidated balance sheet would be hugely effected due to its presence in other countries, The exchange rate of Japanese Yen over other currencies will have a huge impact on it.

3. Economic Exposure:
When a countries exchange rate fluctuates very severely due to economic factor the company might face this type of risk. This is very difficult to predict.
E.g. War in Middle East might have fluctuated foreign exchange rate and companies having presence there will be impacted due to factors which are affecting the economy of Middle East.

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