FINANCIAL RISK MANAGEMENT
1. Identify the main components of
foreign exchange risk.
There is market risk in various
forms. Although the focus of the volatility of prices or rates, management
accountants need to consider other risks such as:
a. Liquidity risk : arises because not
all financial risk management products can be traded freely.
b. Market discontinuity : refers to the
risk that the market does not always lead to price changes gradually.
c. Credit risk : is the possibility that
the other party in contract risk management can’t meet its obligations.
d. Regulatory risk : is the risk
arising from public authorities banned the use of a financial product for a
particular purpose.
e. Tax risk : is the risk that certain
hedging transactions can’t obtain the desired tax treatment.
f. Accounting risk : is the chance that
a hedging transaction can’t be recorded as part of a transaction that seeks to
protect the value.
2. Task of managing foreign exchange
risk.
Risk management can enhance
shareholder value identifying, controlling / managing the financial risks actively
confronting active. If the value of
the company to match the present value of cash flow in the future, active
management of potential risks can be justified which some of the following reasons.
-
Management
exposure helps in stabilizing the current expectations for company cashes.
-
Exposure
Active Management to concentrated allow the company to a major business risk.
-
Debitors,
employees, and customers also get some benefit of exposure management.
3. risk of translation.
Potential
Risk of Translation.
There
are two types of translational position of the potential risks:
1)
The potential risk of exposure to positive = Assets > liability exposure.
-
The
value of foreign currency decreased, meaning loss translation.
-
The
value of foreign currency increases, the mean translational advantage.
2)
The potential risk of exposure to negative = assets < liabilities exposed.
4.
Potential
Risk Transactions
Potential risks
and benefits of the transaction arising in connection with the loss of value foreign
exchange adjustment transactions denominated in foreign currency yang dominant
loss transaction profits and impact on cash flows.
5. Differences in accounting risk and
economic risk.
accounting risk, is the chance that a hedging transaction
can’t be recorded in addition to part of the transaction is hedged about
6. Exchange rate hedging strategies and
accounting treatment required.
Balance Sheet Hedging
The strategy of protection by adjusting the
level and value of monetary assets and liabilities denominated corporate exposed.
Some of hedging method in a subsidiary located in country prone to devaluation
are:
- · Maintain cash balances in local currency at the minimum level required for support the current operation.
- · Returns the profit above the required amount of capital to the parent expansion for a company.
- · Accelerate (ensure-leading) the receipt of the outstanding trade receivables denominated in local.
- · Delay (slow-lagging) the payment of debt a currency local.
- · Accelerating debt payment in the foreign currency.
- · Invest excess cash into the stock of debt other and assets in local currency that is not too affected by the loss devaluation.
- · Investing in overseas assets with a strong currency.
7. Accounting and control problems,
related to risk management of foreign exchange.
Disclosure
in FAS 133 and IAS 39 are: risk management objective and strategy for the
protection value of transaction.
-
Description
of the posts are protected value.
-
Identification
of the market risk of the hedged items value.
-
Description
of the hedge instrument value.
-
The
amounts are not included in the effectiveness of assessment hedging value.
-
Justification
of the initial (a priori) that the relationship will be very effective value
protected to minimize market risk.
Assessment runs on the actual hedge
effectiveness.
Sources:
1) Choi, Frederick D.S.,
and Gerhard D. Mueller, 2005., The International Accounting - Book 1, Issue 5.,
Salemba Four, Jakarta.
2) Choi, Frederick D.S.,
and Gerhard D. Mueller, 2005., The International Accounting - Book 2, Issue 5.,
Salemba Four, Jakarta.
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