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Discussion 6 Foreign Exchange Exposures

Transaction, translation, and operating exposures are the three main types of foreign exchange exposure that affect Delta Airlines' profitability and cash flows. Transaction exposure relates to contractual obligations denominated in foreign currencies, translation exposure affects foreign currency financial statements, and operating exposure involves future foreign-currency-denominated cash flows. To mitigate these exposures, Delta utilizes hedging strategies like forward contracts to lock in exchange rates for expected foreign currency cash flows and offsets foreign currency positions. Reducing international capacity during weak foreign currencies and gaining revenue traction as currencies strengthen are also strategies Delta employs to manage foreign exchange challenges.

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92 views

Discussion 6 Foreign Exchange Exposures

Transaction, translation, and operating exposures are the three main types of foreign exchange exposure that affect Delta Airlines' profitability and cash flows. Transaction exposure relates to contractual obligations denominated in foreign currencies, translation exposure affects foreign currency financial statements, and operating exposure involves future foreign-currency-denominated cash flows. To mitigate these exposures, Delta utilizes hedging strategies like forward contracts to lock in exchange rates for expected foreign currency cash flows and offsets foreign currency positions. Reducing international capacity during weak foreign currencies and gaining revenue traction as currencies strengthen are also strategies Delta employs to manage foreign exchange challenges.

Uploaded by

Fatima Ayyat
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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6-2 Discussion: Foreign Exchange Exposures

Foreign exchange exposure is the potential of any organization for their organization
profitability, market value and the free cash flow that is result due to the change of exchange
rate. The types of exposure risk are transaction exposure (short-run), translation exposure, and
running exposure. Transaction exposure is the financial obligation of an organization that will
not be settle after exchange rate while translation is foreign currency financial statement and
operating exposure is the change in foreign currency due to the future cash flow concern.
(Moffett, M. 2021).
It is fact that Delta’s have massive global working potential and operating capacity. So they are
concern to all three kinds of exposure risk. Transaction exposure is the sensitivity of realized
domestic foreign money values of the company’s contractual cash flows denominated in foreign
currencies to unexpected changes in exchange rates. On the other side the monetary and
economics exposure, transaction exposure is properly-defined and it is for the short-term.
Hedging transaction by the way of forward contract is achieved by buying and selling of payable
or receivable forward. Money market hedge is obtained or achieved by lending and borrowing of
present value of foreign currency payable or receivable forward and it is growing offsetting
overseas currency positions. Two hedging method are equivalent if the interest rate parity is
holding.
Delta Air line have plan to reduce or cut down their international capacity during the year of
2015-2016 winter season to strengthen its unit revenue performance that become dragged down
by means of weakening currencies towards the USD. In late 2015 Delta airline is looking to
regain some unit revenue traction because it reduces its supply to weaker appearing markets. The
agency believes that lower fuel price and its persevered favorable unit cost overall performance
need to offset the currency headwinds it faces as operating margins are forecasted at 16% to
18%. Despite of the challenge due to the stronger USD Delta Airline expects margin and
profitability expansion in 2015. Current foreign exchange challenge due to the domestic
environment Delta Air line positioned as solidly. Delta may additionally want to further refine its
global potential or international capacity cuts.
Transaction exposure is normally short-time period and is tied to a settlement or contract.
Operating exposure offers with measuring future cash flows. The present value of the
organization is calculating by the way and mean of contemplating any change in future cash
flows because of a trade of exchange rate. The company that have subsidiary in many or
different countries and often need to transfer foreign currency to its domestic currency are
encounter translation exposure. Companies could want to keep a near eye on fluctuating
exchange rate as to not lose any money by using shifting cash over at an awful time. In order to
guard themselves from those kinds of dangers and risk, Delta have to enter into forward contracts
for you to lock in exchange rate nowadays to avoid any crazy future fluctuation.
The report of Amazon 2021 10K identified that they face many risk related to the international
sale and operation. These risk include government regulation, economics and political condition,
restriction on the sales of certain product and limited technology infrastructure and lower
consumer spending. Because of the foreign exchange rate change or fluctuation operating result
may not be expected. Amazon show significant loss and gain in their balance. The revenue and
expense of the company are understate or overstate due to the consumer spending ,global
economics and payment risks.
Reference

 Stonehill, A., Eiteman, D., & Moffett, M. (2021). Multinational Business Finance.
Retrieved from https://etext-ise.pearson.com/courses/5868176/products/91458/pages/
248?

 https://www.sec.gov/Archives/edgar/data/1018724/000101872421000004/amzn-
20201231.htm

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