4IFM1TU00963_-041140597_TMA-2.docx - BBF308/05 International Financial Management Contents Question 1.3 Question 2.5 Question 3.6 Question 4.7

4IFM1TU00963_-041140597_TMA-2.docx - BBF308/05...

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BBF308/05 International Financial Management Contents Question 1 ....................................................... 3 Question 2 ....................................................... 5 Question 3 ....................................................... 6 Question 4 ....................................................... 7 References ..................................................... 10 pg. 1
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BBF308/05 International Financial Management Question 1 Foreign exchange exposure is the variance in the expected exchanging rate arising from unanticipated changes in currency exchange rate. Or, in another to say is it is an unanticipated changes in currency exchange rates will affect the sensitivity of real domestic currency value of assets, liabilities and also the operating income. There are 3 main types of foreign exchange exposures: i) Transaction; ii) economic; and iii) translation. Transaction exchange exposure is the exchange rate movement will appearing in the financial statement and affect in the financial reporting. It measure the lost or gain that arise from all the settlement of existing financial obligations the term of which are stated in foreign currency, because of the exchange rate fluctuations will change the value of a contract before it is settled. Usually this involve in short to medium term. An example of transaction exchange exposure is, when a local company signed a contract with a foreign company which stated that the local company will send 1,000 units of products to the foreign company and the foreign company will then pay for the goods in 4 months with 100 units of foreign currency. Assume that time currency exchange rate is 1 unit of local currency equals to 1 unit of foreign currency. The money that the foreign company have to pay is equals to 100 units of local currency. But 4 months later, the exchange rate had changed. Now, 1 unit of local currency equals to 2 units of foreign currency, the value now is only worth 50 units of local currency. The local company suffer 50% loss in value. Thus, to prevent this transaction risk, some firms are using forward rates to lock in an exchange rate so that can prevent the risk happen. Economic exchange exposure is an unexpected currency fluctuation on a company’s operations like future cash flows and market value and so on. Even a company is only make sales in local do not export to overseas, it can still affected by economic exposure. It is because the company may need to import some raw materials from another countries, which may get a cheaper price thus help in competitive advantage. pg. 2
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BBF308/05 International Financial Management Hence, example for this economic exchange exposure is Hospital is serving more in citizen and do not try to expand business to overseas, but hospital will get medicine from another countries which may have more effective medicine. Thus, even a hospital will still affected by this risk. Because hospital have to increase in the expenses to import medicine due to increase in the exchange rate.
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