Exchange Rates
Published on Feb 01, 2016
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PRESENTATION OUTLINE
Currency & Exchange Rates
Presented By: ERIC GILLILAND, Shelly John, NICK O'Neill, & Melinda Worth
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AGENDA
- Summarize Article
- Currency Flucuations
- Types of Risk
- Manage Risk
- Finanical Impacts
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Foreign Exchnage RISK
WHAT TO DO?
When the financial performance can be affected by fluctuation in exchange rates you have possible risk
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Currency Appreciation
Demand increase
As demand for Aussy dollars increase the value of currency rises which could make imports cheaper and more attractive to consumers as well as more competitive in the international market
STEP 1: TYPEs OF Risk
- Transaction Risk
- Translation Risk
- Economic Risk
VALUE AT RISK MODEL - SENSITIVITY ANALYSIS
TRAN - cash flow risk and deals with the effect of exchange rate moves on transaction account exposure related to receivables (contracts) MEASURE - project the net amount of inflows or outflows in each foreign currency, and determine the overall risk of exposure to those currencies.
TRANSLATION- Is basically balance sheet exchange rate risk and relates exchange rate moves to the
valuation of a foreign subsidiary and, in turn, to the consolidation of a foreign subsidiary to the parent company’s balance sheet. MEASURE Exposed assets and liabilities are translated at the current
exchange rate. Non-exposed assets and liabilities are translated at the historical
exchange rate.
ECON - Is the risk that adverse currency movements will affect the customer’s core business, rather than an individual transaction. MEASURE One measure of economic exposure involves classifying the firm’s
cash flows into income statement items, and then reviewing how the earnings forecast in the income statement changes in response to alternative exchange rate scenarios. Another method of assessing a firm’s economic exposure involves applying regression analysis to historical cash flow and exchange
rate data.
VALUE AT RISK MODEL - SENSITIVITY ANALYSIS
TRAN - cash flow risk and deals with the effect of exchange rate moves on transaction account exposure related to receivables (contracts) MEASURE - project the net amount of inflows or outflows in each foreign currency, and determine the overall risk of exposure to those currencies.
TRANSLATION- Is basically balance sheet exchange rate risk and relates exchange rate moves to the
valuation of a foreign subsidiary and, in turn, to the consolidation of a foreign subsidiary to the parent company’s balance sheet. MEASURE Exposed assets and liabilities are translated at the current
exchange rate. Non-exposed assets and liabilities are translated at the historical
exchange rate.
ECON - Is the risk that adverse currency movements will affect the customer’s core business, rather than an individual transaction. MEASURE One measure of economic exposure involves classifying the firm’s
cash flows into income statement items, and then reviewing how the earnings forecast in the income statement changes in response to alternative exchange rate scenarios. Another method of assessing a firm’s economic exposure involves applying regression analysis to historical cash flow and exchange
rate data.
VALUE AT RISK MODEL - SENSITIVITY ANALYSIS
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