Chapter 10: Measuring Exposure to Exchange Rate Fluctuations

A series of vocabulary flashcards focusing on key terms related to measuring exposure to exchange rate fluctuations.

Transaction Exposure

The sensitivity of a multinational corporation’s (MNC) contractual transactions to changes in exchange rates.

Economic Exposure

The sensitivity of a firm's cash flows to exchange rate movements, broader than just transactions, includes all cash flows.

Translation Exposure

The exposure of an MNC’s consolidated financial statements to exchange rate fluctuations.

Value at Risk (VaR)

A measurement technique that estimates the maximum expected loss over a specified period for a given confidence level.

Exchange Rate Risk

The potential for financial loss due to fluctuations in currency exchange rates.

Foreign Exchange (f/x) Exposure

The risk associated with changes in the value of currencies affecting cash flows.

Correlation

A measure of the degree to which two currencies move in relation to each other.

Volatility

The degree of variation of a trading price series over time, commonly measured as standard deviation.

Scenario Analysis

A process of evaluating the impact on cash flows by examining various exchange rate scenarios.

Proportion of Business

The share of an MNC’s operations that are conducted through foreign subsidiaries, impacting translation exposure.