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Chapter 10 Transaction and Translation Exposure * These lecture notes include material Copyrighted by Pearson Prentice Hall. Learning Objectives n Distinguish between the three major foreign exchange exposures experienced by firms n Analyze the pros and cons of hedging foreign exchange transaction exposure n Examine the alternatives available to a firm for managing a large and significant transaction exposure n Evaluate the institutional practices and concerns of foreign exchange risk management Learning Objectives n Demonstrate how translation practices result in a foreign exchange exposure for the multinational enterprise n Explain the meaning behind the designation of a foreign subsidiarys functional currency n Illustrate both the theoretical and practical differences between the two primary methods of translating foreign currency denominated financial statements into the currency reporting of the parent company n Compare translation exposure with operating expense n Analyze the costs and benefits of managing translation exposure Foreign Exchange Exposure n Foreign exchange exposure is a measure of the impact of changes in exchange rates on a firms profitability , net cash flow , and market value These three components (profits, cash flow and market value) are the key financial elements of how we view the relative success or failure of a firm While finance theories tell us that cash flows matter and accounting does not, we know that currency- related gains and losses can have destructive impacts on reported earnings which are fundamental to the markets opinion of that company Foreign Exchange Exposure n Types of foreign exchange exposure Transaction Exposure measures changes in the value of outstanding financial obligations incurred prior to a change in exchange rates but not due to be settled until after the exchange rate changes Translation Exposure also called accounting exposure , is the potential for accounting derived changes in owners equity to occur because of the ... View Full Document

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