Chapter 10 (1)

Chapter 10 (1) - CHAPTER 10 Measuring and Managing...

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Unformatted text preview: CHAPTER 10 Measuring and Managing Translation and Transaction Exposure 2 ALTERNATIVE MEASURES OF FOREIGN EXCHANGE EXPOSURE I. ALTERNATIVE MEASURES A. TYPES 1. Accounting or Translation Exposure: arises when reporting and consolidating financial statements require conversion from subsidiary to parent currency. 2 3 How Translation Risk Arises Translation Risk Subsidiary Financials Subsidiary Financials Subsidiary Financials Headquarters' Consolidated Financials $ Japan United States Germany 3 4 Economic Exposure 2. Economic Exposure: arises because exchange rate changes alter the value of future revenues and costs. 4 5 ALTERNATIVE MEASURES OF FOREIGN EXCHANGE EXPOSURE Economic Exposure = Transaction Exposure + Operating Exposure Operating Exposure arises because exchange rate changes alter the value of future revenues and costs. 5 6 ALTERNATIVE CURRENCY TRANSLATION METHODS I. FOUR METHODS OF TRANSLATION A. Current/Noncurrent Method 1. Current accounts use current exchange rate for conversion. 2. Income statement accounts use average exchange rate for the period. 6 7 ALTERNATIVE CURRENCY TRANSLATION METHODS B. Monetary/Nonmonetary Method 1. Monetary accounts use current rate 2. Pertains to- cash- accounts receivable- accounts payable- long term debt 7 8 ALTERNATIVE CURRENCY TRANSLATION METHODS 3. Nonmonetary accounts...
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This note was uploaded on 02/22/2011 for the course BMGT 446 taught by Professor Staff during the Spring '08 term at Maryland.

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Chapter 10 (1) - CHAPTER 10 Measuring and Managing...

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