ASSIGNMENT
ON
INTERNATIONAL FINANCIAL MANAGEMENT
SUB
MITTED TO : SUBMITTED BY :
DR. ANU KOHLI AYUSH BISHT
ASSISTANT PROFESSOR MBA SEM 4TH
LUCKNOW UNIVERSITY ROLL NO. 180012135043
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ACKNOWLEDGEMENT
I would like to express my special thanks of gratitude to
my professor Dr. Anu Kohli who gave me the Golden
opportunity to this wonderful project on the topic
“Translation Exposure :Nature & Management” ,
which also helped me in doing a lot of research and I
came to know about so many new things I am really
thankful to them.
Secondly, I would also like to thank my parents and
friends which helped me a lot in finalizing this project
within the limited time frame.
AYUSH BISHT
MBA 4TH SEM
(FINANCE)
ROLL NO. 08
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TRANSLATION EXPOSURE: NATURE &
MANAGEMENT
The Translation Exposure or Accounting Exposure is the risk of loss
suffered when stock, revenue, assets or liabilities denominated in foreign
currency changes with the movement of the foreign exchange rates.
In other words, the translation exposure stems from
the requirement of converting the subsidiary’s assets and liabilities
(operating in another country) denominated in foreign currency in the
home currency of the parent company, at the time of preparing the
consolidated profit and loss statement and the balance sheet. Thus, any
change in the foreign exchange rate will have a considerable impact on
the financial statements.
Assume that Mani (India) Ltd., has a wholly owned subsidiary, Priety
Inc. in USA. The exposed assets of the subsidiary are $200 million and
its exposed liabilities are $100 million. The exchange rate changes from
$0,020 per rupee to $0,021 per rupee.
The potential foreign exchange gain or loss to the company will be
calculated as follows:
In this case, the net exposure is:
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if the post-devaluation rate is $0,019, then
Post Devaluation Value, ($100 million ÷ 0.019) = Rs.5,263 million
In this case,
Potential Exchange Gain – Rs.263 million
In translating the items denominated in foreign currency in the domestic
currency, an accountant encounters two issues:
1. Whether the financial statement items denominated in foreign
currency are converted at the current exchange rate or at the rate
which was prevailing at the time the transaction occurred
(historical exchange rate)?
2. Whether the profit or loss that arises from the rate adjustments be
taken into the current period profit and loss statement or be
postponed?
If there is any change in the exchange rate over the previous accounting
period, then the translation of the items denominated in the foreign
currency will result in foreign exchange gains or losses, except when
there is a tax implication on these items.
The translation exposure is concerned with the recorded profits and the
balance sheet values and does not affect the overall value of the firm.
Since the gains or losses suffered due to the translation of financial items
has no significant impact on the stock prices of the firm. And the
investors do believe that such risk can be diversified and hence does not
demand any extra premium for it.
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MEASURING TRANSLATION EXPOSURE
The following are the methods of measuring translation exposure:
CURRENT/NONCURRENT METHOD
Current assets and liabilities having a maturity of one year or lesser are
translated at the current exchange rate. Noncurrent assets and liabilities
are converted at the past exchange rate that prevailed at the time the
asset or liability was recorded in the books. Under this method, a foreign
subsidiary owning current assets in excess of the current liabilities will
incur a translation gain if the local currency appreciates. The income
items are usually calculated at the prevailing exchange rate. While, the
depreciating items, falling under non-current items are calculated at the
historical exchange rate.
MONETARY/NONMONETARY METHOD
In this method, all monetary balance sheet accounts such as cash, notes
payable, accounts payable and marketable securities of a foreign
subsidiary are converted at the current exchange rate. The remaining
nonmonetary balance sheet accounts and shareholder’s equity are
converted at the past exchange rate when the account was recorded. This
method works on the philosophy that monetary accounts are similar as
their value is equivalent to an amount of money, the value of which
changes with fluctuations in exchange rates. The monetary/nonmonetary
method categorizes accounts on the basis of similarities of attributes
rather than maturities.
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TEMPORAL METHOD
In the temporal method, monetary accounts, both current and
noncurrent, such as receivables, payables, and cash are converted at the
current exchange rate. The other balance sheet accounts if carried out on
the books at current value are converted at the current rate. However, if
they are carried out in the past, they are converted into the historical rate
of exchange that prevailed during that time. Cost of goods sold
and depreciation are converted at the historic rates if the balance sheet
accounts associated with it were carried out at historical costs.
CURRENT RATE METHOD
Under this method, all balance sheet accounts except for stockholder’s
equity, are converted at the prevailing current exchange rate.
The income statement items are converted at the existing exchange rate
on the dates the items are recognized.
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TRANSLATION EXPOSURE MANAGEMENT
The following are the ways to manage or hedge translation exposure:
CURRENCY SWAPS
Currency swaps are a settlement between two entities to exchange cash
flows denominated for a particular currency for a fixed time frame.
Currency amounts are swapped for a predetermined period and interest
is paid during that time span.
CURRENCY OPTIONS
The Currency option gives the right to the party to exchange the amount
of a particular currency at an agreed exchange rate. However, the party
is not obligated to do so. Nevertheless, the transactions must be
conducted on or before a set date in the future.
FORWARD CONTRACTS
Under the forward contracts, two entities fix a specific exchange rate for
the interchange of two currencies for a future date. The settlement for
the agreed amount of currencies is conducted on the particular future
date which is pre-decided.
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REFERENCES
https://businessjargons.com/translation-exposure.html
https://efinancemanagement.com/international-financial-
management/translation-exposure
http://www.yourarticlelibrary.com/forex-management/4-types-
of-risk-exposure-and-their-impact-foreign-exchange/98615
