Exposure Analysis

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Foreign Exchange Exposure Analysis

Exposure Analysis for Foreign exchange means the risk of loss stemming from exposure to adverse foreign exchange rate movements.
“A measure of the potential change in the business or companies profitability, net cash flow and market value because of a change in exchange rates”

- These three components (profits, cash flow and market value) are the key financial elements of how we view the relative success or failure of a firm
- While finance theories tell us that cash flows matter and accounting does not, we know that currency-related gains and losses can have destructive impacts on reported earnings – which are fundamental to the markets opinion of that company

The foreign exchange rate exposure of a firm is a measure of the sensitivity of its cash flows to changes in exchange rates. Since cash flows are difficult to measure, most researchers have examined exposure by studying how the firm’s market value, the present value of its expected cash flows, responds to changes in exchange rates

Foreign exchange exposure is defined as the degree to which a company is affected by exchange rate changes.

The magnitude of the gain or loss that results from a particular exchange rate change is:

FX Gain (Loss) = [ St+n - St ] [ Exposure ]

Exposure is expressed in units of the underlying host currency, the exchange rate is the price of the host currency in units of home currency (i.e. $/FC), and hence the exchange rate gain/loss is in home currency units.

Variable / Cash Flows Transaction Type
Contracted Foreign Currency Cash Both Capital and Revenue in nature
FlowsForeign Interest Rates, whether All Interest Payments/ Receipts
Floating or Fixed

Cash Flows from Hedge Transactions All Open hedge transactions

Projected/ Contingent Cash Flows Both Capital and Revenue in nature

Analysis These exposures will be analysed and the following aspects will be studied:

- Foreign Currency Cash Flows/ Schedules
- Variability of Cashflows - how certain are  value dates?
- Inflow-Outflow Mismatches / Gaps Time Mismatches / Gaps
- Currency Portfolio Mix
- Floating / Fixed Interest Rate ratio

Company Details

Exposure Analysis

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