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International Market Expansion - Essay Example

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Exposure actually measures the sensitivity of the value of the foreign currency’s associated risk factors. Risk on the other hand however,…
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International Market Expansion
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Download file to see previous pages per prevailing accounting standards, all firms must translate their foreign currency exposures in local currency in order to represent them on their balance sheets. This exposure normally arises when a parent company needs to convert the liabilities/assets of its subsidiary in its balance sheet. The risk arising as a result of this translation is termed as translation exposure. (Wang, 2009)
It actually measures the sensitivity when the assets or liabilities of Citibank are actually liquidated due to fluctuations in currency exchange rate. Transaction risk and exposure arises when they are liquidated and hence may gain or lose value in the process of conversion. It is critical to note that transaction exposure do not create any impact on the cash flows of the firm whereas transaction exposure does have an impact on the cash flows of the firm. International firms therefore have to consider this aspect into account also.
Translation exposure often arises due to recording of items on the balance sheet therefore Citibank can engage into standards balance sheet hedge in order to safeguard themselves against any changes in the values. Transaction exposure can also be managed by entering into foreign exchange derivatives. Citibank can actually manage its transaction exposure by entering into forward and future exchange rates with counterparties. Foreign currency swaps as well as other more sophisticated instruments may also be used to manage transaction risk. More specifically, Citibank however, need to define risk limits against each currency besides forming policy regarding counterparties. This will actually allow Citi Group to manage counterparty risk associated with the parties with whom it actually enters into foreign currency transactions. (Riad A. Ajami & Goddard, 2006)
1. International banks tend to facilitate international trade and to ensure the movement of goods and services across political borders. International banks though not deal in goods but provide ...Download file to see next pagesRead More
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