Page 120 - DMGT549_INTERNATIONAL_FINANCIAL_MANAGEMENT

Unit 7: Management of Transaction Exposure

Transaction Exposure: Transaction exposure measures gains or losses that arise from the Notes
settlement of existing financial obligation whose terms are stated in a foreign currency.

7.8 Review Questions

1. Define transaction exposure.
2. How is transaction exposure different from accounting exposure?
3. How do you measure transaction exposure? Give example.
4. Elucidate the various techniques to manage transaction exposure.
5. Compare the three kinds of exposure – transactions, translation and economic.

6. Can a company use the hedging techniques to protect itself against expected exchange rate
changes? Explain.
7. Is transaction exposure relevant? Elucidate.

8. When can an MNC’s subsidiary consider using a “leading” strategy to reduce transaction
exposure?
9. ‘MNCs with less risk can obtain funds at lower financing costs.’ Elucidate with examples.

10. ‘Currency correlations are not constant over time – MNC cannot use previous correlations
to predict future correlations with perfect accuracy. Do you agree. Illustrate your answer
with the help of trend in exchange note movements of various currencies against the
dollar.

Answers: Self Assessment

1. True 2. False

3. Future currency 4. Borrowing and lending
5. Hedge risks 6. Offsetting exposures
7. Lower 8. Sell
9. Buy 10. Exchanges

11. True 12. False
13. False 14. True
15. True 16. True

7.9 Further Readings

Books Apte, P.G. International Financial Management, Tata McGraw Hill Publishing
Company Limited, New Delhi.
Bhalla, V.K. International Financial Management, Anmol Publishers.
Eun/Resnick, International Financial Management, Tata McGraw Hill Publishing
Company Limited, New Delhi.
Shapiro Allan C, Multinational Financial Management, Prentice Hall, New Delhi.

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