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WWW.CFOSTUDIO.COM
3rd Quarter 2012
CFO CFO
2
Charlie Stough
Chief Financial Officer, Atalanta Corporation
W
e live and work in a very uncertain world. any company
in the united states that buys or sells products to or from
companies in other countries faces currency risk, even
if the transaction is denominated in u.s. dollars (usd).
either the buyer or the seller has to manage the risk, and that action
has an impact on the agreed-upon price.
foreign currency exposures are generally categorized into the fol-
lowing three distinct types:
transaction exposure, economic exposure,
and
translation exposure.
These exposures pose risks to firms’ cash
flows, competitiveness, market value, and financial reporting.
a firm has transaction exposure whenever it has contractual cash
flows (receivables and payables) whose values are subject to unantici-
pated changes in exchange rates due to a contract being denominated
in a foreign currency. to realize the domestic value of its foreign-
denominated cash flows, the firm must exchange foreign currency for
domestic currency. as firms negotiate contracts with set prices and
delivery dates in the face of a volatile foreign exchange market with
exchange rates constantly fluctuating, the firms face a risk of changes
in the exchange rate between the foreign and domestic currency. such
outcomes could be troublesome, as export profits could be negated
entirely or import costs could rise substantially.
a firm has economic exposure when bidding for foreign projects
or negotiating other contracts or foreign direct investments. such an
exposure arises from the potential for a firm to suddenly face a transac-
tional or economic foreign exchange risk, contingent on the outcome
of some contract or negotiation. for example, a firm could be waiting
for a project bid to be accepted by a foreign business or government
that if accepted would result in an immediate receivable. While wait-
ing, the firm faces a contingent exposure from the uncertainty as to
whether or not that receivable will happen. if the bid is accepted and a
receivable is paid, the firm then faces a transaction exposure, so a firm
may prefer to manage contingent exposures.
Hedging
STRATEGIES
CURRENCY
REDUCINGCOSTS
ON INTERNATIONAL
TRANSACTIONS