What is the difference between economic exposure and transaction exposure?
Both Transaction and economic exposures are cash exposures. The difference is that transaction exposure is caused by individual transactions of accounts receivable or payable, while the economic exposure is uncontrollable and affects the total value of the firm.
Why translation exposure is relevant to an MNC?
Translation exposure is most evident in multinational organizations since a portion of their operations and assets will be based in a foreign currency. In order to properly report the organization’s financial situation, the assets and liabilities for the whole company need to be adjusted into the home currency.
Which exposure is more difficult to manage transaction exposure or economic exposure explain?
Economic exposure is more difficult to manage because it covers the entire life of a foreign investment project and all aspects of a company’s operations. Transaction exposure is easier to manage because it covers a specific period of time and specific contracts.
Why should an MNC identify net exposure before hedging?
Why should an MNC identify net exposure before hedging? ANSWER: An MNC can reduce the amount of cash flow that it needs to hedge when identifying net exposure first. This can reduce the transaction costs associated with hedging.
What is economic exposure in relation to the other forms of exposure risk a MNC is facing?
Economic exposure is a type of foreign exchange exposure caused by the effect of unexpected currency fluctuations. Exposure increases as foreign exchange volatility increases and decreases as it falls. Can be mitigated either through operational strategies or currency risk mitigation strategies.
Is economic exposure a subset of transaction exposure?
Transaction exposure is a subset of economic exposure. Consideration of all cash flows in a particular currency is not necessary when some inflows and outflows offset each other. Only net cash flows are necessary.
What is translation exposure is management of translation exposure more important that economic exposure discuss?
1 Answer. Translation exposure is also referred to as accounting exposure. This arises because the financial statements of foreign subsidiaries must be restated in the parent’s reporting currency for the firm to prepare its consolidated financial statements.
What is the difference between transactions and economic exposure which can be hedged more easily why?
Transaction exposure arises only when you enter into a contract involving future receivables/payables in foreign currency. Hence the scope remains narrow. Economic exposure can arise without having any transaction exposure and hence the scope remains wide.
How is economic exposure managed?
Economic exposure can be mitigated either through operational strategies or currency risk mitigation strategies. Operational strategies involve diversification of production facilities, end-product markets, and financing sources.
Why would an MNC consider examining only its net cash flows in each currency when assessing its transaction exposure?
Why would an MNC consider examining only its “net” cash flows in each currency when assessing its transaction exposure? ANSWER: Transaction exposure is due only to international transactions by a firm. This could affect the firm’s cash flow, but did not affect the value of any ongoing transactions.
What is transaction translation and economic exposure?
Transaction exposure deals with actual foreign currency transactions. Translation exposure deals with the accounting representation and economic exposure deals with little macro-level exposure which may be true for the whole industry rather than just the firm under concern.
What is the difference between economic exposure and Transaction exposure?
These cash flows are not realised or contracted for and the exposure is more anticipatory in nature. Economic exposure can arise due to change in future sales, volume, pricing or cost profile. Transaction exposure arises only when you enter into a contract involving future receivables/payables in foreign currency.
What is the scope of economic exposure?
Economic exposure can arise without having any transaction exposure and hence the scope remains wide. For example: domestic cash flows can be impacted due to foreign competition in domestic market, linked to foreign exchange difference.
What drives economic exposure to cash flow variability?
On the other hand, future currency cash inflows /outflows drive economic exposure. As a part of international financial management, companies are often exposed to cash flow variability purely on the account of exchange rate fluctuations. While some cash flow risk is short term in nature, others are longer term risks.