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Chapter 11
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Transaction Exposure
• 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
Copyright © 2007 Pearson Addison-Wesley. All rights reserved. 1-3
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
