MGT 321 Saudi Electronic University Exposure to Foreign Exchange Risks Discussion: Business & Finance Answers 2021

MGT 321 Saudi Electronic University Exposure to Foreign Exchange Risks Discussion: Business & Finance Answers 2021

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MGT 321 Saudi Electronic University Exposure to Foreign Exchange Risks Discussion

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Discuss the three main types of exposure to foreign exchange risk, differences between them
and how they could be deduced? with APA reference style
and please reply to these 2 discussion
1)
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hree main types of exposure to foreign exchange risk are: Transaction exposure, Economic
exposure, and Translation Exposure
Transaction exposure
The transaction exposure segment of the foreign exchange rates is likewise alluded to as a short-term
economic exposure. This identifies with the danger joined to explicit agreements in which the
organization has effectively entered that foreign exchange exposure
An organization may have an exchange exposure on the off chance that it is either on the purchase
side or sell side of a deal. Any exchange that prompts an inflow or outflow of foreign currency
results in a transaction exposure.
Economic exposure
Economic exposure is a long-term impact of transaction exposure. If an organization is consistently
impacted by the inevitable risk to foreign exchange over the long term, it said to have economic risk.
Exposure to foreign exchange effects a result on the market value of the organization as the danger is
inherent to the organization and affects its profitability over the years.
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Translation Exposure
Translation exposure of foreign exchange is of a bookkeeping nature and is identified as a profit or
loss resulting from the transformation or translation of the financial records of a subsidiary located in
another country.
An organization with subsidiaries or tasks in foreign nations is presented to interpretation hazard.
Toward the finish of the monetary year, the organization is needed to report all its associated tasks in
the homegrown cash terms prompting a loss or profit getting from the development in different
foreign monetary currencies.
2)
Foreign exchange exposure is categorized into three types, which are
Transaction exposure, Translation exposure, and Economic exposure. These three
types are important to understand and analyze the right view of the company?s
business and to take well informed decisions.
Transaction exposure is considered to be the simplest exposure. It is related to
business involvement with foreign currencies. For instance, once the business buys
goods or supplies from a foreign country and the amount is due to be paid months
later, currency value might change. I could be much higher in a few months. So, the
company is forced to pay much higher costs than now. As a result, it will harm, and
cause lost to the company.
Translation exposure, also known as accounting exposure, is basically an
exposure due to translation of accounting books. For example, a translation activity is
carried on to the shareholders or managers of the company to review the exchange
rate. In addition, it is proposed to clarify where the company is positioned in term of
its home currency, through translated financial statements.
Economic exposure has much importance, and its impact is greater than the
other two types. This exposure directly affects the value of the company. Meaning
that the company?s value, which is the operating cash flows, and its possessed assets
are exposed to risk. It is not easy to identify or measured. Even though the assets
exposure is visible in the books, operating exposure is otherwise. It is related to many
factors like competitiveness and entry barriers.
Transaction exposure happens due to international transactions performed by
the company. While Economic exposure includes any changes that will affect the
company?s financial reports. Translation exposure involves the extent of how the
exchange rate affects the company?s financial reports.
Minimizing foreign exchange risk can be done through applying the following
tools.
1.
Forward contracts:
With a forward contract, the company can enter into a legal agreement to carry
out an overseas money transfer at some point in the future by fixing an exchange rate
in advance.
1. Limit and stop loss orders:
With a limit order, the company gets to set an exchange rate that is better than
the existing rate, and once the market reaches the desired level, it transfers goes
through automatically.
1. Forex swaps:
This is another option presented to businesses. In a typical forex swap, two
parties enter into an agreement to exchange two different currencies in equivalent
amounts for a given time period, and then reverse the exchange later.
4. Multi-currency accounts:
Using a multi-currency account gives the company the ability to hold funds
and transact in different currencies. When it make payments from or receive payments
in accounts denominated in matching currencies, it doesn?t have to worry about
exchange rates because no exchange of currencies takes place.

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