Managing Global Financial Risks - Essay Example

Translation Exposure is also known as accounting exposure, which is used to measure the impact of fluctuation of international currencies on the balance sheet of a company. Whenever the currency appreciates (overvalued) or depreciates (undervalued) will increase or decrease the effect of loss or profit made by the subsidiary (Shim, Shim & Siegel, 2008, pp 365).

Transaction exposure is linked with the future gain or loss which the company will be making related to future obligation settlements. To handle transitional risk, the company goes for different hedging techniques, but hedging is more profitable in the short term as compared to the long term (Shim, Shim & Siegel, 2008, pp 365).

Economic exposure is the most sensitive exposure because its effect is far broader as compared to the others. The extent to which economic exposure will affect a company depends on the nature of the company or the industry in which the company is. These economic factors can be macroeconomic factors that have an impact worldwide or can be microeconomic factors like socio-economic factors or political factors specific to a particular country (Shim, Shim & Siegel, 2008, pp 365).

By undertaking all this exposure, BMW decides on its marketing and production strategy to reduce its foreign risks.

The main motto of any organization is to reduce the cost of production and to increase profit for the stakeholders. Through marketing, the management tries to increase revenue, so such strategies are being made through which BMW can increase their sale in those countries where the currency is appreciating or is overvalued and they will restructure their marketing plan for the countries where the currency is depreciating or are undervalued. The same strategy is adopted while launching new products into the market; BMW introduces its new products when currencies are appreciating so that they can collect revenue as high as possible. Thus the process is more or less like a long-term call option. BMW remains highly cautious about finalizing its marketing expenditure. The company always keeps in mind that marginal expenditure made on any unit should be less than the marginal profit per unit.