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Translation, Transaction and Economic Exposures

Translation, Transaction and Economic Exposures 

  1. Assume that General Electric (GE)’s current assets are $401 billion, fixed assets are $797 billion, current liabilities are $323 billion, and long-term liabilities are zero. Calculate GE’s translation exposure using current/non-current, monetary/non-monetary, temporal, and current rate methods. 
    (Hint: You won’t be able to calculate using all the four methods based on given information. If you can’t calculate using a method, state so and include the reason.)
  2. Toyota has exposed assets of ¥7 billion and exposed liabilities of ¥5 billion. During the year, the yen appreciates from ¥110/$ to ¥80/$.

a. What is Toyota's net translation exposure at the beginning of the year in yen? In dollars?
b. What is Toyota's translation gain or loss from the change in the yen's value?
c. At the start of the next year, Toyota adds exposed assets of ¥1.5 billion and exposed liabilities of ¥2 billion.
During the year, the yen depreciates from ¥80/$ to ¥115/$. What is Toyota's translation gain or loss for this year?
What is its total translation gain or loss for the two years
d. What is Toyota’s total translation gain or loss for the two years?

3. Suppose an agribusiness in Texas exports its crops. It expects an 18 million peso invoice for an export to Mexico to be paid in 90 days. The current spot and 90-day forward rates are $0.7502/Peso and $0.7422/Peso respectively.

a. Calculate the company’s peso transaction exposure associated with this fee.
b. If the spot rate expected in 90 days is $0.7489, what is the expected U.S. dollar value of the invoice?
c. What is the hedged dollar value of the invoice?

3.  Suppose an agribusiness in Texas exports its crops. It expects an 18 million  peso invoice for an export to Mexico to be paid in 90 days. The current spot and 90-day forward rates are $0.7502/Peso and $0.7422/Peso respectively.

Calculate the company’s peso transaction exposure associated with this fee.

If the spot rate expected in 90 days is $0.7489, what is the expected U.S. dollar value of the invoice?

What is the hedged dollar value of the invoice?

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Transaction Exposure Assignment

  1. General Electric Exposure

[blur] According to the current and the non-current method of the General Electric’s method of translating the exposure the company stands at about $401 billion. However, based on the information that we have at present in the question, it is impossible to determine either the monetary or the non-monetary translation exposure for the company since the above question has not addressed the breakdown of its assets or liabilities either in monetary or the non-monetary terms. In addition, it is also not possible to determine the temporal exposure since the details that we have been provided do not list the cost outlay of the current assets for both the inventory and monetary based assets. The temporal method is designed to rely on the exchange rated on assets that based on times any liabilities that have been incurred and as per the question both the assets and the liabilities are not presented and have not been presented as such (Wang, 2009). [/blur]

[blur] However by relying on the Current rate method which is the most common currency translation method or standard, an individual would calculate the GE’s Exposure as  $401 B - $797 B – 323 B) = $875 B [/blur]

[blur] The second method would be the current/noncurrent method which was most preferred 1935 to 1975. It would portray the GE’s translation exposure as $401 billion - $401 billion, or 0. The current/ noncurrent method considers the current assets and liabilities of a foreigner translating them by the current exchange rate (Wang, 2009). [/blur]

[blur] It is worthy to note that it’s impossible to ascertain the translation exposure  by using the  monetary/nonmonetary method since as per the details that have been provide, there lacks the breakdown of the assets and liabilities both in the monetary and nonmonetary terms (Siddaiah, 2010). [/blur]

Toyota

[blur] The net translation exposure for Toyota Company initially at the start of the year stood at = ¥ 2 B (¥ 7 B - ¥ 5 B). However, once converted to the dollar currency. The total translation exposure stands $18,181,818. The conversation rate considered for this analysis is (¥ 2 B /110 (rate)) [/blur]

[blur] By considering the exchange rate at the end of the year, the company’s translation exposure would be = $ 25,000,000 (¥ 2 B / 80). This leads to gain in the total net translation for that year to stand at $ 6,818,182 ($ 25,000,000 - $18,181,818). [/blur]

[blur] Thus, in the period in the beginning of the year, the translation exposure would be ¥ 1.5 B (¥ 2 B + ¥ 1.5 B - ¥ 2 B) [/blur]

[blur] The translation for that year would thus reflect as $5,706,521.74 (1,500,000,000 / 80 - 1,500,000,000 / 115) [/blur]

[blur] For the two year period. The gain that would reflect would be (6,818,812 – 5,706,521.74) = $ 1,111,660.26 [/blur]

3. Texas Exports

a).The transaction exposure for the Company Peso is 18,000,000*.7502=13503600

B). [blur] to find the difference between both the Spot and Forward Rate = 0.7502 - 0.7422 = 0.008 [/blur]

[blur] In calculating the exposure in reference to the Peso the amount would be = 13,503,600 x 0.008 = 108028.80 Peso [/blur]

[blur] If the Spot Rate (the value of the asset at time of its quote were to be for 90 Days at $0.7489 [/blur]

[blur] Thus the expected value of the invoice for those 90 days would be: =18000000*0.7489 = 13480200 [/blur]

c). [blur] in calculating the value of the hedge within 90 days = =18000000*0.7422 = 13359600 [/blur]

References

Siddaiah, T. (2010). International financial management. Upper Saddle River, NJ: Pearson.

Wang, P. (2009). The economics of foreign exchange and global finance. Berlin: Springer-Verlag.

Translation, Transaction and Economic Exposures

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