Having our operations overseas means that we are also exposed to a ‘transaction risk’. Transaction risks include also risks involved in borrowing or lending money denominated in a foreign currency since these would involve interest and principle repayments in foreign currency.
We are exposed to transaction risk as when we issued the corporate bond and also when we build a new plant (which is a real investment to us) in Vietnam, a foreign country. This is because with such a long term investment we would be expected to generate positive net cash flows in Vietnamese Dong.
As an importer of raw materials and parts, it is to our disadvantage if the value of the currency in which we trade increases, as our import products will become correspondingly more expensive. Conversely, as an exporter you can find yourself at a disadvantage if currency rates fall, as you then run the risk of receiving lower than expected prices for your export products.
1.5.5 Transfer Risks
Our business may face transfer risk. This happens when businesses possess assets that, if converted into another currency, could result in an adverse financial situation. Our profit/loss balance sheet is drawn up in Vietnamese Dong, but our main account is in Singapore dollars. Ultimately our total balance will be dependent not just on our balance sheet in Dong, but also on the value of that balance after it is converted into Singapore dollars at the current exchange rate.
1.5.6 Commodity risk
Being an electronics manufacturer, we commonly need to produce and build circuit boards which can be form in the computers, radios and other devices. In our production of circuit boards, some of the raw materials that we use most often are copper and plastic.
We can hedge against fluctuations in such commodity prices as it will affect our revenue and cost. Exposures are managed via swaps, purchase of options, contracts for differences and fixed price and forward contracts.... [continues]
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