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Translation exposure


What is cashbackforexpipcalculator cashbackforexprofitcalculator? Translation exposure, also known as "account cashbackforexcalculatorOnlineg exposure", refers to the risk that a multinational enterprises financial statements are consolidated at the end of the accounting period cashback forex calculator Online the historical exchange rates used to form assets and liabilities, revenues and expenses are different from the prevailing exchange rates (or period-end exchange rates) used in the consolidation of the statements, resulting in a distortion in the book value of the relevant accounting items. The measurement of translation exposure is mainly determined by the following three factors: 1. The size of foreign subsidiaries Generally speaking, the size of foreign subsidiaries is large, and the proportion of the overall business of multinational companies is large. As the financial statements of subsidiaries are usually measured in the currency of the host country, the translation amount of each item in the consolidated statements cashback forex be affected by the stability of the host countrys currency. At present, the methods of translation of financial statements are not uniform, and various methods of translation will yield different figures when translating the same statements as described in Chapter 9, Section 3. If the inventory items in the subsidiary statements are translated at the current exchange rate because they are liquid items, they are exposed to translation; however, if the inventory items are classified as non-monetary items and translated at the historical rate, they are not exposed to translation. Other items, such as long-term liabilities, fixed assets at replacement cost, etc., may also be translated differently due to different methods of translation. For the control of translation exposure, assets and liabilities are generally controlled by means of asset-liability matching, i.e., creating new foreign currency assets or liabilities to offset the original existence of The specific methods that can be used for foreign currency assets or liabilities with translation exposure are the same as the various hedging methods used to control transaction exposures For example, suppose a U.S. multinational corporation has a wholly owned subsidiary in the U.K., and at the beginning of a year it is expected that the subsidiary will earn £loo0000 for the year, and the subsidiary plans to use all of the earnings to reinvest locally, then the multinational corporation, although there is no foreseeable transaction exposure (no need to To eliminate the risk of translation exposure of this £loo0000 investment, the multinational company needs to find a way to create a roughly equivalent amount of £ liabilities globally At the end of the year, if the £ exchange rate increases, the multinational company will incur a loss due to the ownership of the liabilities, but at the same time the consolidation of the subsidiarys profit and loss will result in a gain of an equivalent amount, the two If the pound exchange rate decreases, the gain from the ownership of the liabilities will offset the decrease in consolidated earnings, ensuring that the earnings of the subsidiaries will not be reduced due to changes in exchange rates. Hedging the translation exposure has difficult problems in practice, such as inaccurate earnings forecasts, the unavailability of forward contracts in certain currencies, etc., and more seriously, sometimes in order to eliminate the translation exposure but bring about transaction exposure, thus creating a situation where both exposures cannot be eliminated at the same time. Therefore, the best way to deal with the translation exposure is to devote the foreign exchange risk management to transaction exposure and economic exposure, while for the translation exposure, it is only necessary to state in the financial statements the amount of the current periods consolidated earnings affected by the translation exposure and the rise and fall of the translation exposure Management of the translation exposure Because of the similarity between the transaction risk and the translation risk management approach, many management books put However, even with the same management approach, the magnitude and effect of full protection required to achieve full protection may differ from that of transaction risk due to tax avoidance and other factors. The above-mentioned preservation strategy actually requires companies to try to offset the exposed foreign currency assets and liabilities against each other in order to achieve this, either by adjusting the assets or by adjusting the liabilities. or a two-pronged approach For example, a firm wishing to reduce its translation exposure should convert its exposed asset holdings (e.g., bank deposits) into home currency denominated assets or reduce its foreign currency denominated liabilities and replace them with local currency denominated liabilities before the local currency is devalued This adjustment can be done either directly or indirectly Direct adjustments include purchasing hard currency imports, purchasing Indirect adjustments include intracompany transfer pricing, acceleration of dividend, fee and royalty payments and early and late payment adjustments. As mentioned earlier, translation exposure is only a book exposure is a current static book reaction to past results. Only on this basis will adjustments be made so as not to lose one or the other, and so that current period adjustments do not lead to larger adjustments or operational difficulties in the future. If the majority of companies anticipate the devaluation of a currency, each local company will try to postpone the collection of foreign currency receivables and will try to raise funds from the local financial markets, which will inevitably worsen the credit and financing conditions and reduce the amount of cash held in local currency, which will probably lead to In addition, the size of discounted exposure of the same company measured by different discounting methods is not the same, and the items are not consistent. For example, under the current method, inventories and fixed assets are non-exposed assets, while under the current method, they are not, and the treatment of each is necessarily different. If a company has a net translation exposure of $30,000 calculated according to the prevailing exchange rate method, it can sell U.S. dollars in the forward market if it predicts a devaluation in one year, and when the companys predicted dollar devaluation becomes a reality within one year and is lower than the forward exchange rate level, it buys U.S. dollars from the spot market and settles the forward U.S. dollar sale If the dollar depreciates enough after one year, the principal and interest earned from the hard currency investment will exceed the principal and interest earned from the dollar borrowing, and the risky dollar assets will be offset. The effectiveness of either forward market or money market hedging ultimately depends on the actual exchange rate at maturity, and when the actual exchange rate does depreciate, the firm will benefit from it, and if not, the firm will suffer losses.  

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