Question

Risks in international trade literature review

Answer 1

There are three types of Exposures in International Trade :

• Translation or accounting exposure : This deals with the exposure arising from the translation of financial statements of the foreign subsidiaries and branches into the parents companies reporting currency. Since no actual cash flows are involved, such an exposure is notional. However, if the markets are immature and treat the loss as actual, it starts affecting share price.
• Transaction exposure : This exposure arises when a firm has a known amount of foreign currency payable or receivable the home currency equivalent of which is unknown/uncertain for instance (i) an Indian firm importing goods from Japan and having YEN 40 million payable is afraid of Yen appreciating (ii) an Indian firm exporting goods to UK and having EURO 10 million receivable is afraid of EURO depreciating against Rupees.
• Economic or Operating exposure : It is faced by almost all the firms as it can arise even without having FC receivable/payable.