Slide MGT411 Slide08

(1)

(2)

• _{Foreign exchange exposure is a measure of the}

potential for a firm’s profitability, net cash

flow, and market value to change because of a change in exchange rates.

• _{An important task of the financial manager is}

to measure foreign exchange exposure and to manage it so as to maximize the profitability, net cash flow, and market value of the firm.

• _{The effect on a firm when foreign exchange}

(3)

Moment in time when exchange rate changes

Translation exposure

Transaction exposure

Operating exposure

Time

Changes in reported owners’ equity in consolidated financial statements caused by a change in exchange rates

Change in expected future cash flows arising from an unexpected change in exchange rates

Impact of settling outstanding obligations entered into before change in exchange rates but to be settled after change in exchange rates