Managing Exposure to COVID-19

Hello James, thanks for the post. I would like to add that transaction exposure is the degree of uncertainty companies involved in global trade experience. This is the risk that currency exchange rates will change after a company has already experienced a financial obligation. A large degree of uncertainty to shifting exchange rates can result in chief capital losses for the global firms. One way that entities can restrict their exposure to fluctuations in the exchange rate is by implementing a hedging strategy. Via hedging utilizing forward trades, they might lock in a favorable currency exchange rate and avert exposure to risk. An entity’s transaction exposure is computed currency by currency and totals the dissimilarity between contractually fixed future cash outflows and inflows in every currency. The main approaches companies use to manage transaction exposure include but not limited to risk shifting, currency and risk sharing and lagging alongside leading. 

The two approaches for controlling translation exposure are a balance sheet hedge and derivative hedge. Balance sheet hedging represents a complete treasury model that companies use when operating with foreign currencies to decrease the possible effect of exchange rate changes in books of financial position. This approach is advantageous since it offers insight into the future value of the currency. Nonetheless, balance sheet hedging requires a long time to understand and make decisions for entities. Derivative hedging includes three approaches namely foreign exchange risks, hedging interest rate risk, and product input hedge. Derivative hedging is more straightforward compared to the balance sheet approach and evaluates all elements within the financial statements of a corporation. This form of hedging provides an understanding of the position a company is in and approaches that should be put in place to ensure prosperity in the market. However, the derivatives are sometimes time bombs when not used properly.