international financial managers encounter? Identify four tasks involved in managing foreign
exchange risk. How does translation exposure differ from
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Translation Exposure (contin)
Multiple currency translation exposure report
Enables a parent company to aggregate its translation exposure reports for all foreign subsidiaries.
Internal risk factors
Financial reporting risks Liquidity and leverage Commodity price changes Equity price changes Liquidity Credit exposure Regulatory compliance Tax exposure Accounting risk
International Accounting, 6/e Frederick D.S. Choi Gary K. Meek
Chapter 11: Financial Risk Management
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Learning Objectives
What does risk management entail? What are the various types of market risks that
Monetary-nonmonetary method
Exposure = monetary assets minus monetary liabilities
Current-noncurrent method
Exposure = current assets minus current liabilities
Company can analyze its worldwide translation exposure by currency.
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Enterprise in the context of a firm’s business strategy External risk factors to consider:
Macroeconomic factors Exchange rate behavior Political intelligence Competitive environment Revenue concentration Inflation rates Immigration regulations Physical security Data security Technological obsolescence
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Why Manage Financial Risks?
Stabilize expected cash flows Facilitate concentration on primary business risk Align interests of shareholders and bondholders Maximize returns on pension fund investments Limit exposure of firm’s clients to financial risks
Measure a firm’s FX exposure.
Account for specific hedge products.
Evaluate effectiveness of hedging programs.
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Translation Exposure
Translation exposure: measures impact of FX changes on domestic currency equivalents of foreign currency assets and liabilities.
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Accounting Dimension of FX Risk Management
Identify potential FX risk.
Quantify tradeoffs associated with alternative riskresponse strategies.
transaction exposure? What is a financial derivative and how is it measured? Identify three types of foreign currency hedges and
their accounting treatments recommended by IAS 39 and FAS 133.
Current rate translation method
Exposure = total assets minus total liabilities
Temporal method
Exposure = monetary assets (including nonmonetary assets measured at current values) minus monetary liabilities