Acc 305 Assignment 2: Foreign Currency Risk

Jul 18th, 2016
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Albert, CEO of XYZ, Inc., desires to expand the company’s sales through exports to three (3) foreign subsidiaries. Albert knows that the target subsidiaries are located in countries that require transactions to be denominated in the local currencies. Albert has researched foreign currency risk and knows that there is accounting exposure in accounting statements, operating exposure in future cash flows, and transaction exposure in outstanding obligations. Albert does not understand how these risks apply to XYZ, Inc. under his proposal or if there are any mitigating risk strategies available. Albert requests you, the head of the Risk Management division, to prepare a report that he can present to the Board of Directors on the potential foreign currency risk if XYZ, Inc. expands sales into these markets. XYZ, Inc.’s reporting currency is the U.S. dollar and the subsidiaries would purchase the merchandise as inventory items. Note: You may create and / or make all necessary assumptions nee

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Specify accounting exposure, operating exposure, and transaction exposure. Determine themain financial statement effects of each type of exposure if XYZ, Inc. expands as proposed.Accounting Exposure: The risk of the loss in value of assets or accounts of a company,dominated in foreign currencies due to fluctuation of exchange rate is referred to as accountingexposure. For instance if a company has its assets dominated in the foreign currency whichdecrease in value then a company's assets will also decrease in value in terms of its localcurrency.Financial Statement Effect: Accounting exposure results in changes in the owner's equity inconsolidated financial statements due to fluctuations in exchange rate.Operating Exposure:Operating exposure also referred as economic exposure, competitiveexposure or strategic exposure, is the risk of change in the present value of a firm due tofluctuations in future operating cash flows because of changes in interest rates.Financial Statement Effect: Operating exposure results in change in future cash flows affectingstatement of cash flows, resulting from unexpected change in interest rates.Transaction Exposure: Transaction exposure is the risk involved in fluctuation of exchange rateafter a company has entered into a transaction, prior to the accomplishment of transaction in sucha way that changes in interest rate adversely affects the transaction.Financial Statement Effect: Transaction exposure impacts the settlement of

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