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Unit 14: Management Control of MNC’s

Notes
Figure 14.4: Schematic Picture of Currency Exposure

Currency Exposure

Short-term Long-term

Accounting Cashflow Operating Strategic

(Translation)

Contractual Anticipated
(transaction)

14.6.3 Transaction Exposure

This is a measure of the sensitivity of the home currency value of assets and liabilities which are
denominated in foreign currency, to unanticipated changes in the exchange rates, when the
assets or liabilities are liquidated. The foreign currency values of these items are contractually
fixed i.e., they do not vary with exchange rate. You may recall the example above of a firm with
USD 100,000 payable. This is also known as contractual exposure.

Some examples that lead to transaction exposure are:
1. A currency has to be converted in order to make or receive payment for goods and
services.

2. A currency has to be converted to repay a loan or make an interest payment (for foreign
currency loan) or receive a repayment of loan or an interest on loan and advances
(denominated in foreign currency).
3. A currency has to be converted to make a dividend payment, royalty payment (to overseas
shareholders or overseas collaborators).
In all the cases, the foreign currency value of the item is fixed, the uncertainty pertains to home
currency value. For example, if a firm has entered into a contract to sell cars to foreign customers
at a fixed price denominated in foreign currency, the firm would be exposed to exchange rate
movements till it receives the payment and converts the receipts into the domestic currency. The
exposure of a company in a particular currency is measured in net terms i.e., after netting of
potential cash inflows with outflows.

Notes The important points to be noted are:

1. Translation exposures usually have short-term horizons and
2. Operating cash flows are affected.

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