International Finance Analysis - Operation Exposure

Résumé du document

The translation exposure, also called accounting exposure, is the risk and effects of currency exchange rate changes (by denomination in foreign currency) on consolidated results and balance sheet of a firm (equities, assets, liabilities and income). For instance, an organization has a $ 2 000 000 income with a 1€/$ exchange rate in year n. In year n+2, the company will make again a $ 2 000 000 income but with a 0,9€/$ exchange rate : thus, there will be a risk of currency exchange rates in case of conversion in euro.

Translation exposure differs from transaction exposure because translation exposure assesses accounting gains and losses whereas a transaction exposure measures cash realized gains and losses from a change in exchange rates. What's more, translation exposure impacts balance sheet assets, liabilities and income statement items that already exists – operating exposure will have consequences on revenue and costs associated with future sales – and transaction exposure will have repercussions on contracts already entered into but to be settle at a later date : the difference concerns the moment in time when exchange rate changes.

Extraits

[...] The exchange rates will depend on the state of balance payment and thus of its balance[12]. Regarding the financial account if a country has too much debts, its currency could fall in value and thus to be depreciated. If the current balance is in deficit (that is to say that import are bigger than export), the currencies ask in order to make a payment abroad will be greater to the bid of this same currencies to settle the payment nearby the country the national currency will tend to depreciate or to be devalued with a reduction of the exchange rate in comparison to the other used currencies for these transactions. [...]

[...] The balance of payments bases on a double-entry bookkeeping, is an accounting document relating the whole of entries and exports of goods, services and capitals between resident and nonresident agents[4]. It is a statistical document which records the trade, financial and monetary relationships carried out during a year between one country and the rest of world. The balance of payments is composed of three main accounts which are : the current account , the capital account and the financial account. [...]

[...] The capital account[9] is made up of ownership transfer of fixed assets (debt discharging and investment aid), transfer of funds bounds to the sales or acquisition of assets, non financial sales and acquisition of assets (patents , copyright, hire purchase agreement, intangible assets) The financial account distinguishes different classes[10] : the direct investment, the portfolio investment, the private and official short-term capital, the private and official long term capital, change in reserves , the exceptional financing and the net errors and omissions. The direct investment consists in the holding of 10% capital of invested company. The portfolio investment can take the form of interest bond with the holding of less than capital of invested firm, debt bond, debenture and other indebtedness bonds. The private and official short-term capital (examples : warrants, subscription warrant) are derivate financial products which are set aside for the risk coverage. [...]

[...] This system will take in consideration the fact that the parent company buys and sells to the subsidiary and that the subsidiary also purchases and sells to the parent company. Through the barter system , the subsidiary sells the higher value goods received from the parent company which allows to repatriate profits : there is no payment. The repatrited profits are equivalent to the difference amount in value of the received and sent goods. Why dividends are not a preferred method to transfer profits back to the parent company. [...]

[...] interest rate: p.a. Using the exchange rates and interest rates from the attached list, calculate the forward premium or discount on the Calculation of the forward discount on the As the depreciates, we will calculate the forward discount on the Forward discount ((spot rate forward rate) / forward rate 360/180)*100 Forward discount = 1,08 360/180)*100 Forward discount = / 1,08)*2)*100 Forward discount = (0,0185*2)* 100 Forward discount= 0,037 * 100 Forward discount = The forward discount adds up to Using the information from above, calculate how much profit you could make from Covered Interest Arbitrage if you begin by borrowing £1,000,000 and investing in the Spot rate: 1.10 6 month forward rate: 1.08 interest rate: p.a. [...]