TRANSLATION EXPOSURE

MEANING

“ The risk of loss that might arise due to changes in value of the stock,

revenue, assets or liabilities of a business due to foreign exchange

rate movements. “

A business has translation exposure when some of its stock, revenue,

assets or liabilities are denominated in a foreign currency and need to be

translated back to its base currency for accounting purposes.

All firms generally must prepare consolidated financial statements for

reporting purposes, the consolidation process for multinationals entails

translating foreign assets and liabilities or the financial statements of

foreign subsidiary, subsidiaries from foreign to domestic currency.

TRANSLATION METHODS

Current/Non-current method: Under this, current assets and liabilities are valued at current rate & non-current assets and liabilities at historical rate.

Monetary/Non-monetary method: Under this method, all monetary items are valued at current rates and non-monetary items at historical rates.

Temporal method: Under this method the inventory and investments are translated at current rate if they are valued at the market price.

Current rates: Under this method all assets, liabilities, income & expenses are translated at current rates of exchange.

MANAGING TECHNIQUES

Balance sheet hedge This consists of bringing about a balance between the

net exposed assets and liabilities, so that the net exposure is 0. If exposed assets are more than exposed liabilities, the exposure can be made zero by increasing the liability. Similarly if liabilities are more than assets we make more purchases of assets.

Exposure netting An MNC may see to that the positive exposure by a

negative exposure in the same or similarly placed currencies (i.e., with appreciating or depreciating currency) They cannot be balanced by crossing currencies.

Cont…

Leading & lagging

Assets > Liabilities Foreign currency appreciated LEAD

Assets < Liabilities Foreign currency depreciated LAG

Forward contract A company with a positive exposure (assets more

than liabilities) will sell forward the exposed currency to balance the net effect on balance sheet. A company with a negative exposure (liabilities more than assets) will purchase forward the currency to get the same result.

Presented by, Rashad A.K Vishnu. M