International Financial Management

Running head: INTERNATIONAL FINANCIAL MANAGEMENT
International Financial Management
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1INTERNATIONAL FINANCIAL MANAGEMENT
Table of Contents
Question 1:.......................................................................................................................................2
Question 2:.......................................................................................................................................3
Part a:...........................................................................................................................................3
Part b:...........................................................................................................................................3
Part c:...........................................................................................................................................3
Part d:...........................................................................................................................................4
Part e:...........................................................................................................................................4
Question 3:.......................................................................................................................................5
Part a:...........................................................................................................................................5
Part b:...........................................................................................................................................5
Question 4:.......................................................................................................................................6
Question 5:.......................................................................................................................................6
Question 6:.......................................................................................................................................7
Question 7:.......................................................................................................................................7
References:......................................................................................................................................8

2INTERNATIONAL FINANCIAL MANAGEMENT
Question 1:
1. Transaction exposure: It is the risk of loss from variation in exchange rates in the course of a
business transaction. For example, an US organisation might sell products to an UK organisation,
which would be paid in pounds valuing $100,000 at the booking date. Later on, when the
customer paid the organisation, there was change in foreign exchange rate resulting in payment
of $95,000. Hence, the change in foreign exchange rate has resulted in loss of $5,000 for the
seller (Abdel-Khalik & Chen, 2015).
2. Economic exposure: It could be defined as the risk that the foreign investments, cash flows
and earnings might suffer owing to the fluctuating rates in foreign currency exchange (Bekaert &
Hodrick, 2017). For instance, Company ABC is an organisation involved in importing products
from Japan for selling them in USA. In case; JPY was gain against USD, it would be more
expensive for Company ABC in purchasing products from import, which would eventually hurt
its business operations. For minimising this risk, the organisation could hedge its business by
using Forex, in which it could undertake investments increasing in value with rise in JPY.
3. Translation exposure: It could be described as the risk that the assets, equities, income or
liabilities of an organisation would change in value due to the change in exchange rate (Bhalla,
2014). For example, if an organisation is in possession of any facility situated in Germany
amounting to €1 million and the current exchange rate of Euro-dollar is 1:1, the property would
be sold at $1 million. However, the exchange rate changes to 1:2, there would be change in the
reporting of the asset value, as it would be sold for $500,000. This amount has to be reported as
loss on the financial statements.