exchange rate
1. Issue one: Foreign exchange risk and economic implication
In the context of international trade and integration, multinational companies have a lot of opportunities to expand and make profits but they are also likely to face new challenges. One of the most risks such firms need to be recognized is foreign exchange exposure which is directly related to foreign exchange rate. 1.1. Possible foreign exchange risk
In order to have a comprehensive view regarding foreign exchange risk, this part will define as well as separate this exposure into clearer and smaller concepts. Firstly, it is highlighted to indicate that foreign exchange exposure possibly occurs as a result of the fluctuation of exchange rates, leading to negative effects on profitability, cash flows and other financial indicators of multinational companies. In this case, managers will find more difficult to manage and run their companies and the need to measure such exposures becomes very necessary. Therefore, with the purpose of clarifying and measuring foreign exchange risks, it is separated into three common kinds including transaction, economic and translation exposure. Besides that, based on empirical researches, tax exposure in spite of happening seldom, is also discussed in this paper. The following figure will reveal clear separation of foreign exchange risk:
In particular, the first concept expressed is transaction exposure which is associated with fluctuation of actual cash flows out of the value they should be. In other words, contractual obligations in the future are likely to take transaction risk, resulting in the depreciation of value of payment currency. Normally, transactions relating to receivables and payables of multinational companies are relevant popular examples in this case. In addition, buying foreign bonds or getting involved investments denominated in foreign money is likely to suffer from transaction exposure. Taking into account the second type, economic exposure, the
In the context of international trade and integration, multinational companies have a lot of opportunities to expand and make profits but they are also likely to face new challenges. One of the most risks such firms need to be recognized is foreign exchange exposure which is directly related to foreign exchange rate. 1.1. Possible foreign exchange risk
In order to have a comprehensive view regarding foreign exchange risk, this part will define as well as separate this exposure into clearer and smaller concepts. Firstly, it is highlighted to indicate that foreign exchange exposure possibly occurs as a result of the fluctuation of exchange rates, leading to negative effects on profitability, cash flows and other financial indicators of multinational companies. In this case, managers will find more difficult to manage and run their companies and the need to measure such exposures becomes very necessary. Therefore, with the purpose of clarifying and measuring foreign exchange risks, it is separated into three common kinds including transaction, economic and translation exposure. Besides that, based on empirical researches, tax exposure in spite of happening seldom, is also discussed in this paper. The following figure will reveal clear separation of foreign exchange risk:
In particular, the first concept expressed is transaction exposure which is associated with fluctuation of actual cash flows out of the value they should be. In other words, contractual obligations in the future are likely to take transaction risk, resulting in the depreciation of value of payment currency. Normally, transactions relating to receivables and payables of multinational companies are relevant popular examples in this case. In addition, buying foreign bonds or getting involved investments denominated in foreign money is likely to suffer from transaction exposure. Taking into account the second type, economic exposure, the