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TYPES OF EXPOSURES

Discuss TYPES OF EXPOSURES within the Financial Management ( FM ) forums, part of the Resolve Your Query - Get Help and discuss Projects category; Financial economists distinguish between three types of currency exposures - transaction exposures, translation exposures, and economic exposures. All three affect ...

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TYPES OF EXPOSURES
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Sunanda K. Chavan
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TYPES OF EXPOSURES - October 8th, 2010

Financial economists distinguish between three types of currency exposures - transaction exposures, translation exposures, and economic exposures. All three affect the bottom- line of the business.

TRANSACTION EXPOSURE
Suppose that a company is exporting deutsche mark and while costing the transaction had reckoned on getting say Rs 24 per mark. By the time the exchange transaction materializes i.e. the export is affected and the mark sold for rupees, the exchange rate moved to say Rs 20 per mark. The profitability of the export transaction can be completely wiped out by the movement in the exchange rate. Such transaction exposures arise whenever a business has foreign currency denominated receipt and payment. The risk is an adverse movement of the exchange rate from the time the transaction is budgeted till the time the exposure is extinguished by sale or purchase of the foreign currency against the domestic currency.

TRANSLATION EXPOSURE
Translation exposure arises from the need to "translate" foreign currency assets or liabilities into the home currency for the purpose of finalizing the accounts for any given period. A typical example of translation exposure is the treatment of foreign currency borrowings. Consider that a company has borrowed dollars to finance the import of capital goods worth Rs 10000. When the import materialized the exchange rate was say Rs 30 per dollar. The imported fixed asset was therefore capitalized in the books of the company for Rs 300000. In the ordinary course and assuming no change in the exchange rate the company would have provided depreciation on the asset valued at Rs 300000 for finalizing its accounts for the year in which the asset was purchased.
If at the time of finalization of the accounts the exchange rate has moved to say Rs 35 per dollar, the dollar loan has to be translated involving translation loss of Rs50000. The book value of the asset thus becomes 350000 and consequently higher depreciation has to be provided thus reducing the net profit.

ECONOMIC EXPOSURE
An economic exposure is more a managerial concept than a accounting concept. A company can have an economic exposure to say Yen: Rupee rates even if it does not have any transaction or translation exposure in the Japanese currency. This would be the case for example, when the company's competitors are using Japanese imports. If the Yen weekends the company loses its competitiveness (vice-versa is also possible).
The company's competitor uses the cheap imports and can have competitive edge over the company in terms of his cost cutting. Therefore the company's exposed to Japanese Yen in an indirect way.

In simple words, economic exposure to an exchange rate is the risk that a change in the rate affects the company's competitive position in the market and hence, indirectly the bottom-line. Broadly speaking, economic exposure affects the profitability over a longer time span than transaction and even translation exposure. Under the Indian exchange control, while translation and transaction exposures can be hedged, economic exposure cannot be hedged.
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Re: TYPES OF EXPOSURES - June 30th, 2015

Meaning and Definition of Exposures

1) The fact or condition of being affected by something or experiencing something : the condition of being exposed to something

2) The act of revealing secrets about someone or something
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Re: TYPES OF EXPOSURES - April 21st, 2016

Quote:
Originally Posted by sunandaC View Post
Financial economists distinguish between three types of currency exposures - transaction exposures, translation exposures, and economic exposures. All three affect the bottom- line of the business.

TRANSACTION EXPOSURE
Suppose that a company is exporting deutsche mark and while costing the transaction had reckoned on getting say Rs 24 per mark. By the time the exchange transaction materializes i.e. the export is affected and the mark sold for rupees, the exchange rate moved to say Rs 20 per mark. The profitability of the export transaction can be completely wiped out by the movement in the exchange rate. Such transaction exposures arise whenever a business has foreign currency denominated receipt and payment. The risk is an adverse movement of the exchange rate from the time the transaction is budgeted till the time the exposure is extinguished by sale or purchase of the foreign currency against the domestic currency.

TRANSLATION EXPOSURE
Translation exposure arises from the need to "translate" foreign currency assets or liabilities into the home currency for the purpose of finalizing the accounts for any given period. A typical example of translation exposure is the treatment of foreign currency borrowings. Consider that a company has borrowed dollars to finance the import of capital goods worth Rs 10000. When the import materialized the exchange rate was say Rs 30 per dollar. The imported fixed asset was therefore capitalized in the books of the company for Rs 300000. In the ordinary course and assuming no change in the exchange rate the company would have provided depreciation on the asset valued at Rs 300000 for finalizing its accounts for the year in which the asset was purchased.
If at the time of finalization of the accounts the exchange rate has moved to say Rs 35 per dollar, the dollar loan has to be translated involving translation loss of Rs50000. The book value of the asset thus becomes 350000 and consequently higher depreciation has to be provided thus reducing the net profit.

ECONOMIC EXPOSURE
An economic exposure is more a managerial concept than a accounting concept. A company can have an economic exposure to say Yen: Rupee rates even if it does not have any transaction or translation exposure in the Japanese currency. This would be the case for example, when the company's competitors are using Japanese imports. If the Yen weekends the company loses its competitiveness (vice-versa is also possible).
The company's competitor uses the cheap imports and can have competitive edge over the company in terms of his cost cutting. Therefore the company's exposed to Japanese Yen in an indirect way.

In simple words, economic exposure to an exchange rate is the risk that a change in the rate affects the company's competitive position in the market and hence, indirectly the bottom-line. Broadly speaking, economic exposure affects the profitability over a longer time span than transaction and even translation exposure. Under the Indian exchange control, while translation and transaction exposures can be hedged, economic exposure cannot be hedged.
Hello friend,

Please check attachment for Measurement of exposures and outcomes, so please download and check it.
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File Type: pdf Measurement of exposures and outcomes.pdf (1.19 MB, 1 views)
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