ABSTRACT
This chapter provides the basic concepts required to manage exchange rate risk exposure. Currency risk exists only when the movements of a currency in the foreign exchange market deviate from expectations. Exchange rate exposure exists only when the value of a company’s assets and liabilities are exposed to unexpected changes in currency values. Exchange rate risk effects on corporate performance are usually classified under the terms of transaction, economic, and translation exposure. To estimate the market value of the subsidiary of a multinational corporation, the financial managers pay special attention to the present value of the cash flows and the exchange rate forecast. Translation exposure refers to changes in the value of income statement and balance sheet items when they are re-expressed at consolidation from local currency terms to the parent company currency terms. Since translation exposure is a measure of the effect of exchange rate variations on a company’s financial statements, it is often referred to as accounting exposure.
