Measuring Exposure to

Exchange Rate Fluctuations

 Types of Exposure
• Transaction exposure
• Economic exposure
• Translation exposure
 Transaction Exposure
• Sensitivity of the firm’s contractual transactions in foreign currencies
to exchange rate movements
• Standard deviation = volatility of currency
• VaR – Max. one-day loss
• % change for next day
• Confidence level
• Standard deviation of daily changes
 Economic Exposure
• Sensitivity of the firm’s cash flows to exchange rate movements
• Sensetivity Analysis
• Regression Analysis
 Economic Transaction
• Sensetivity analysis - separately consider how sales and expense
categories are affected by various exchange rate scenarios.
• Regression analysis:
 Economic Exposure
• Local Currency appreciation vs. depreciation
 Translation Exposure
• Exposure of the MNC’s consolidated financial statements to exchange
rate fluctuations
• The proportion of its business conducted by foreign subsidiaries
• The locations of its foreign subsidiaries
• The accounting methods that it uses