ABSTRACT

Many companies face all types of currency exposure: transaction, translation and economic. The diagram opposite illustrates the position of a UK car manufacturer, exporting cars produced in the UK through a US distribution subsidiary for sale in dollars to the US market.

Transaction exposures arise because production costs are mainly in sterling but income is in dollars.

Translation exposures arise from the net investment in the US distribution company.

Economic exposures are both direct and indirect. Direct exposures relate to future sales in the US market. Indirect exposures relate to the relative price/cost competitiveness of the UK producer against rival producers in the US, Japan, Germany, or France.