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Chapter 17 - Foreign exchange: risk identification and management. In this chapter, students will be able to: Recognise FX transaction, translation, operational and economic risk, formulate an FX policy document, outline methods to identify a company’s FX exposures, describe the implementation of market-based hedging techniques, explain internal non-market-based techniques for managing FX risk. | Chapter 17 Foreign Exchange: Risk Identification and Management 17- Learning Objectives Recognise FX transaction, translation, operational and economic risk Formulate an FX policy document Outline methods to identify a company’s FX exposures Describe the implementation of market-based hedging techniques Explain internal non-market-based techniques for managing FX risk 17- Chapter Organisation 17.1 FX Risk Policy Formation 17.2 Measuring Transaction Exposure 17.3 Risk Management: Market-based Hedging Techniques 17.4 Risk Management: Internal Hedging Techniques 17.5 Summary 17- 17.1 FX Risk Policy Formation Foreign exchange risk exposures can be classified in terms of their impact on a firm’s cash flows, balance sheet, competitive position and value Transaction exposure Translation or accounting exposure Operational exposure Economic exposure 17- 17.1 FX Risk Policy Formation (cont.) Transaction exposure The risk that future foreign currency denominated cash flows will vary on account of exchange rate movements E.g. a contract to import goods from the US denominated in USD 17- 17.1 FX Risk Policy Formation (cont.) Translation or accounting exposure The risk that conversion and consolidation of foreign currency assets or liabilities will impact adversely on the balance sheet E.g. a firm accumulates assets and liabilities overseas and at a future date translates their value onto its consolidated balance sheet 17- 17.1 FX Risk Policy Formation (cont.) Operational exposure The risk that day-to-day operating revenues and expenses will be affected by FX movements E.g. foreign subsidiary operating expenses paid in the currency of the foreign country but sourced in another country such as the parent company 17- 17.1 FX Risk Policy Formation (cont.) Economic exposure The effect of exchange rate movements on the ongoing business operations of a firm (i.e. the net present value of its future cash flows) It includes both transaction exposures and . | Chapter 17 Foreign Exchange: Risk Identification and Management 17- Learning Objectives Recognise FX transaction, translation, operational and economic risk Formulate an FX policy document Outline methods to identify a company’s FX exposures Describe the implementation of market-based hedging techniques Explain internal non-market-based techniques for managing FX risk 17- Chapter Organisation 17.1 FX Risk Policy Formation 17.2 Measuring Transaction Exposure 17.3 Risk Management: Market-based Hedging Techniques 17.4 Risk Management: Internal Hedging Techniques 17.5 Summary 17- 17.1 FX Risk Policy Formation Foreign exchange risk exposures can be classified in terms of their impact on a firm’s cash flows, balance sheet, competitive position and value Transaction exposure Translation or accounting exposure Operational exposure Economic exposure 17- 17.1 FX Risk Policy Formation (cont.) Transaction exposure The risk that future foreign currency denominated cash flows will .
