How to Avoid Translation, Transaction and Economic Exposures in the Economic Cycle
Part 1
Question a
Provide examples of how real world multinational corporations (MNC) reduce their translation, transaction and economic exposures.
Translation exposure is the effect of changes in exchange rates on the accounting values of financial statements (Shapiro, 2010, p.356). The translation exposure arises from the conversion the financial statements denominated in foreign currency from denominated in home currency. The MNCs could reduce their translation by using funds adjustment. For an example, if the devaluation of USD is expected for a Chinese company. The company could use direct funds adjustment such as pricing the exports in RMB and pricing the imports in USD, investing in RMB securities and replacing loans in RMB with the loans in USD. The company also could use indirect funds adjustment as paying out dividens, fees and other expends in advance, and speeding up the payment of accounting payable and delaying the collection of accounting receivable in USD.
Transaction exposure measures the exchange gains and losses in cash flows in the value of domestic currency, which is denominated in foreign currency (Shapiro, 2010, p.357). Multinational corporations often lower transaction exposure by making the contract with bank to lock in a forward exchange rate. For an example, an Australian import company expected to pay to an American supplier 10000 USD for the goods half year later. The company could sign a forward foreign exchange which is fixed at 0.9 AUD per USD, and it allows carrying on the transaction in contract provision deadline any time, take at that time exchange rate as. So if there would be depreciation of home currency, and the Spot exchange rate is at 1.0 AUD per USD, the company had the right to convert their AUD into USD at previous exchange rate which is at 0.9 from bank, so the amount of balance was the financial savings in cash flows.
Economic exposure measures the impact of exchange rate fluctuations on the operating cash
Question a
Provide examples of how real world multinational corporations (MNC) reduce their translation, transaction and economic exposures.
Translation exposure is the effect of changes in exchange rates on the accounting values of financial statements (Shapiro, 2010, p.356). The translation exposure arises from the conversion the financial statements denominated in foreign currency from denominated in home currency. The MNCs could reduce their translation by using funds adjustment. For an example, if the devaluation of USD is expected for a Chinese company. The company could use direct funds adjustment such as pricing the exports in RMB and pricing the imports in USD, investing in RMB securities and replacing loans in RMB with the loans in USD. The company also could use indirect funds adjustment as paying out dividens, fees and other expends in advance, and speeding up the payment of accounting payable and delaying the collection of accounting receivable in USD.
Transaction exposure measures the exchange gains and losses in cash flows in the value of domestic currency, which is denominated in foreign currency (Shapiro, 2010, p.357). Multinational corporations often lower transaction exposure by making the contract with bank to lock in a forward exchange rate. For an example, an Australian import company expected to pay to an American supplier 10000 USD for the goods half year later. The company could sign a forward foreign exchange which is fixed at 0.9 AUD per USD, and it allows carrying on the transaction in contract provision deadline any time, take at that time exchange rate as. So if there would be depreciation of home currency, and the Spot exchange rate is at 1.0 AUD per USD, the company had the right to convert their AUD into USD at previous exchange rate which is at 0.9 from bank, so the amount of balance was the financial savings in cash flows.
Economic exposure measures the impact of exchange rate fluctuations on the operating cash
References: Bank of China, 2012, Packing Loan, International Trade Financing. Accessed on: http://www.boc.cn/en/cbservice/cb3/cb35/200806/t20080627_1324121.html Shapiro, A.C.， 2010, Multinational Financial Management, 9th edn, John Wiley & Sons, New York, p.198, p.227, p.230, p. 356, p. 357, p. 359, p.464, p.466, , p.636, p.638. U.S. Bureau of Economic Analysis, 2012, U.S. Direct Investment Position Abroad on a Historical-Cost Basis. [pic][pic][pic][pic][pic][pic]