1. Transaction Exposure - I am a US investor expecting to receive 1m Euro in 2 years from a client. I don't know what the euro will be worth in 2 years.
Transaction exposure can be mitigated using derivatives. I can short a 2-year USD/EUR forward to mitigate the risk
2. Translation Exposure - this is associated with accounting when on the financial statements one currency is converted to another without necessarily any real economic gains or losses.
3. Economic Exposure - when changes in the currency rates affect the competitive standing of the business. A Russian consumer products manufacturer (with expenses and revenues in Rubles) is likely to sell more products to foreign clients if the local Russian currency devalues
Transaction exposure can be mitigated using derivatives. I can short a 2-year USD/EUR forward to mitigate the risk
2. Translation Exposure - this is associated with accounting when on the financial statements one currency is converted to another without necessarily any real economic gains or losses.
3. Economic Exposure - when changes in the currency rates affect the competitive standing of the business. A Russian consumer products manufacturer (with expenses and revenues in Rubles) is likely to sell more products to foreign clients if the local Russian currency devalues
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