Question

Problem 9: Spade & Brothers has a market equity of USD 190 million. Spade also has USD 80 million in USD denominated net debt. Spade’s FX business exposure is 2.17. What is Spade’s FX equity exposure?

Answer 1

FX exposure is the risk from being exposed to currency other than the parent currency of the company considered. For example if a company considers USD as the parent currency, then no translation risk exists while reporting the assets in the balance sheet ( as in balance sheet assets & liabilities are recorded in USD). Here, although the currency of equity and debt is USD, as there is a FC business exposure of 2.17, clearly the parent currency of the company is not USD and there is a FX risk while translating the assets and liabilities in the balance sheet.

Now the FX business exposure of 2.17 exists which is calculated on the equity and debt together (USD 190+ USD 80= USD 270).

FX equity exposure is calculated on equity of USD 190 as

FX equity exposure = (2.17×190)/270= 1.53

Thus FX equity exposure is 1.53