Slide MGT411 Slide08

Chapter 11
Transaction Exposure

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Transaction Exposure
• Foreign exchange exposure is a measure of the
potential for a firm’s profitability, net cash
flow, and market value to change because of a
change in exchange rates.
• An important task of the financial manager is
to measure foreign exchange exposure and to
manage it so as to maximize the profitability,
net cash flow, and market value of the firm.
• The effect on a firm when foreign exchange
rates change can be measured in several ways.
Copyright © 2007 Pearson Addison-Wesley. All rights reserved.

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Exhibit 8.1 Conceptual Comparison of

Transaction, Operating and Accounting
Foreign Exchange Exposure
Moment in time when
exchange rate changes

Translation exposure
Changes in reported owners’ equity
in consolidated financial statements
caused by a change in exchange rates

Operating exposure
Change in expected future cash flows
arising from an unexpected change in
exchange rates

Transaction exposure
Impact of settling outstanding obligations entered into before change
in exchange rates but to be settled after change in exchange rates
Time
Copyright © 2007 Pearson Addison-Wesley. All rights reserved.

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