International Money and Finance - Essay Example

ompany name “Sunbelt Rentals.” Sunbelt Rentals has 358 facilities across the United States, and functions primarily in the commercial construction market. The company’s annual report from 2010 provides clues on the exchange rate risks. The operating statistics on the number of rental stores and staff strength provide a comparative view of the performance of the Ashtead Group for both Sunbelt Rentals and A-Plant in the years 2009 and 2010 respectively (Ashtead Group Press Release, 2011). Ashtead Group exposure to exchange rate risk develops from translation risk, which emerges from most of the company’s assets, liabilities, income, and costs being written in U.S. dollars.

The changes in the comparative value of Pound Sterling and the U.S. dollar impact on the financial strength and functioning of the company. All of the company’s debt is shown in U.S. dollars in order to secure the revenue stream, hedging against the translation effect erupting from the shift in the dollar exchange rate. The company pays dollar interest on its debts to reduce the impact of any shift in the dollar exchange rate on its income (Moffett et al., 2009, p. 260, Ashtead Group Annual Report Accounts, 2010).

Movement in the exposure of the company against the Pound Sterling or other currencies can create significant transaction exposure. Higher levels of exposure can affect the firm’s short-term cash flow and therefore may force the firm to borrow in order to meet its short-term cash requirements (Moffett et al., 2009, p. 253-255). Until the 31st of October, 2010, all company debts were shown in U.S. dollars and nearly 80% of the value of the company’s net assets was also in dollars. It proved to be a robust hedge against currency fluctuations.

It reduces the impact of exchange rate fluctuations as interest is paid through dollars, thus reducing the effect on pre-tax profits and income. Based on the latest currency mix of Ashtead Group’s profits and dollar debt levels, in