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Exposure refers to the degree to which company is affected by exchange rate change. EXCHANGE EXPOSURE : Extent to which transaction, asset & liabilities of an enterprise are denominated in currencies other than currency of parent company of the enterprise. Exposure arises because enterprise operates in foreign market. Exposure is measured by
Transaction Exposure
Economic/ operating Exposure
TRANSLATION EXPOSURE : Financial statements including information of all subsidiaries has to restate the local currency transactions into home currency and corresponding profit & losses arise due to translation from local currency to home currency. It is translation or accounting exposure.
TRANSLATION EXPOSURE
FOREIGN CURRENCY APPRECIATION
GAIN
T R A N S L A T I O N
E X P O S U R E
LOSS
LOSS
GAIN
ACCOUNTING EXPOSURE :Accounting exposure arises from the need for purposes of reporting to convert the financial statements of foreign operations from the local currency involved to the home currency.
Measurement
Current Non current method Monetary- Non monetary method
Temporal method
Current Rate method
CURRENT NON CURRENT METHOD: The basis of this method is maturity of Asset and Liability. Under this method a foreign subsidiaries Current assets
Non
monetary
items
are
converted
into
Temporal Method:
In temporal method inventory can be
exchange rate.
CURRENT RATE METHOD: Translate all balance sheet and income items at the current exchange rate. Mostly used by British Companies and various MNCs of USA.
TRANSACTION EXPOSURE :
It occurs because of foreign currency denominating transaction. If it remains unhedged than underlying transaction remains exposed to transactional risk. It is real risk and will effect the value of firm and it will result in variable future cash inflows.
A Company that is long a foreign currency will sell the foreign currency forward where as A Company that is short a foreign currency will buy the currency forward.
In this way the company can fix the dollar value of future foreign currency cash flow.
RISK SHIFTING Attempt to invoice exports in strong currencies and imports in weak currencies
RISK SHARING
Currency risk sharing can be used by formulating a customized hedging contract where by a base price is adjusted to reflect certain exchange rate changes. The parties to contract would share the currency risk beyond
EXPOSURE NETTING :It involves the process of exposure in one currency is offset by exposure in another or same currency where exchange rate are expected to move in such a way that profit / losses on one currency position offset profit and losses in another currency.
Three possibilities are considered under exposure netting : Offsetting long position in one currency with short position in same currency. If exchange rate movements of two currencies are positively correlated then firm can offset a long position in one currency with short position in another. If exchange rate movements of two currencies are negatively correlated then short position can be used to offset each other.
ECONOMIC EXPOSURE It may be defined as the extent to which or degree to which the value of firm changes. Measured by present value of future cash flows as a result of exchange rate changes. Economic risk decisions are taken as strategic decision relating to strategic are. Decision reflects on future date the value of firm. Measurement of Economic Exposure Mathematically the economic exposure is expressed PV over e is change in exchange rate. PV change in present value of cash flow when the exchange rate changes by e Operating exposure arises because exchange rate fluctuations can alter the futures operating cash flows. Measuring operating exposure requires a long term view of firm as a going concern. In case of operating exposure it is real and not nominal exchange rate which plays the vital role.
Marketing Strategy
Production Strategy Financial Strategy
MARKETING STRATEGY Market Selection: The major consideration for exporter is to sell the product in a appropriate market by carefully selecting a market. In USA when dollar grew stronger it became stronger as compared to other countries. The domestic exporter faced the problem of costlier exports and eventually they had to pull out from US market to other markets,. On other hand strong dollar gave incentive to Japanese & European to increase their market share in USA. In India when rupee was quiet stronger between 1995 to June 1997. When it stayed around Rs. 36/- to a dollar than Indian exporter suffered and entered into Asian market as a strategy of market segmentation.
PRODUCTION STRATEGY :When the home currency rise is so strong that marketing strategy
PRICING STRATEGY :
It involves deciding about striking a balance between market share and profit margins.
PROMOTION STRATEGY :
while allocating promotional budget currency fluctuations should be taken care of. PRODUCT STRATEGY: Product strategy includes:
New product Introduction Product line decision Product Innovation
FINANCIAL STRATEGY Since marketing and production strategy takes too much time to implement and still more time to get results