Question

How to avoid Operational, Transaction, and Translation Exposure when starting a business in a foreign country. Please give me a reference... I can write out the paper. I need help with how to avoid..

thank you

Answer 1

A company operating in foreign markets can hedge its operating exposure by having an opposite and equal amount of exports or imports. For example, if a company imports raw materials, then it can explore exports to hedge against the currency fluctuation in its payment liabilities. This way the receivables and payables would cancel each other.

For transaction and translation exposure, financial isntruments such as currency forwards, currency futures and options can be used to lockin the rates at which the company would settle the transaction at a future date. This reduces volatility and hence can mitigate transaction/translation exposure.