Question

Suggest the translation method that XYZ, Inc. should use in order to minimize balance sheet exposure. Provide support for you choice.

Albert, CEO of XYZ, Inc., desires to expand the company’s sales through exports to three (3) foreign subsidiaries. Albert knows that the target subsidiaries are located in countries that require transactions to be denominated in the local currencies. Albert has researched foreign currency risk and knows that there is accounting exposure in accounting statements, operating exposure in future cash flows, and transaction exposure in outstanding obligations. Albert does not understand how these risks apply to XYZ, Inc. under his proposal or if there are any mitigating risk strategies available. Albert requests you, the head of the Risk Management division, to prepare a report that he can present to the Board of Directors on the potential foreign currency risk if XYZ, Inc. expands sales into these markets. XYZ, Inc.’s reporting currency is the U.S. dollar and the subsidiaries would purchase the merchandise as inventory items.

Answer 1

Here XYZ Inc is planning to expand its sales through its three subsidiaries located in three different countries which is an good strategy in expansion of market/Customer Base. But when we enter in to a particular market we have to adopt its market conditions and customise ourselves in order to adopt to those conditions. I Mean we have to follow its rules and regulations and procedures set upon. Generally, Currency risk is one of the major risk that is involved in transaction between two different markets in different countries. But in this particular case all counter parties to XYZ are subsidiaries (i.e., Income of all subsidiaries are indirectly or directly income to XYZ inc.,) where if XYZ gains due to Foreign exchange fluctuation, then the counter party will be on loss part to the equivalent amount. Hence there is foreign exchange risk to XYZ inc., as a whole.