Question

Why do you think the depreciation of the Asian currencies adversely affected U.S. firms? Give at least three reasons, relating each reason to a different type of exposure to exchange rate risk for some U.S. firms.  

Answer 1

The returns to US firms reduced as a result of the depreciation of the Asian currencies because of decline in the Asian stock market and currency depreciation.

Types of Exposure:

1.Transaction Exposure

Transaction exposure is the exposure of a multinational company’s foreign currency transaction to fluctuations in foreign exchange.

This is the exposure in which MNCs are exposed to exchange rate risk through contractual transactions in foreign currencies. Many US firms had subsidiaries in Asian countries, the dollar inflows from those countries were low due to depreciation in currencies.

2.Translation Exposure

Translation exposure is the exposure of a multinational company’s balance sheet and income statement items to foreign currency fluctuation.

US firms experiences a decline in payments due to the decline in currencies.

3.Economic Exposure

Economic exposure is the risk that a multinational’s cash flow and foreign investments may be affected by foreign exchange fluctuations.

The US MNCs cash flows were affected by exchange rate fluctuations when Asian currencies depreciated.

I hope that was helpful :)