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management
HARISHA.B.V.
AIP(FINANCE AND CONTROL)
IIM BANGALORE
MODULE 3
Risk
Risk is the measure of deviation from the
expected value .
The risk that cannot be removed is called as
Systematic risk or Un-diversifiable risk.
Systematic risk includes shortage in money
supply, economic policy followed by the
country etc.
However, a part of risk that can be removed
is called as Unsystematic risk or Diversifiable
risk.. An investor can reduce such risk by
holding currencies of various countries.
Transaction exposure
Consolidation /Translation
Exposure
When balance sheets are consolidated ,the
value of assets and liabilities expressed in
the national currency varies as a function of
the variation of the currency of the country
where investment was made.
Economic Exposure
The economic exposure refers to the change in
expected cash flows as a result of an unexpected
change in exchange rates.
If US company in French reduces the French
prices for the products can increase the market
share , conversely if French franc weakens against
dollar then French company will have more
competitiveness than US company.
Techniques of Hedging
Internal hedging
External hedging
Internal techniques
External hedging
Translation exposure
1.
2.
3.
4.
Temporal method
Historical rate for those which are stated at
historical rate.
Current rate for those which are stated at
replacement cost or realizable value.
Similar to monetary/non monetary method
but even stock will be shown under current
rate.
Balance sheet
Assets
Fixed assets
Stocks
Receivables
Cash
Rs
200000
50000
30000
10000
liabilities
Rs
equity
140000
long term
80000
short term
70000
problem
Suppose a French firm has an Indian subsidiary
.The total translation exposure is estimated to be
Indian Rs 1 million .the exchange rates are as
follows.
Spot Rs 6.00
12 months forward Rs 6.0600
The French company anticipates a depreciation of
6% of the Indian Rupee.
If company wants to avoid the potential loss what
amount of Indian Rs it has sell forward.