13.4. ACCOUNTING EXPOSURE 511
of the exposed cashflows themselves, and can even have a different sign: remember
the Android example.
Fourth, it is important to keep in mind that the estimate of exposure that one
calculates changes over time, and may not be very precise at any given moment.
However, this measure is useful—even if it gives us only an approximate indication
of the sign and size of a firm’s exposure—because it forces us to think about the
way exchange rates affect the firm’s operations.
Finally, hedging is like an aspirine—quite useful for short-term headaches but not
a long-run remedy for most serious diseases. It does provide you with a financial
gain that is intended to offset operating losses, but it does not reduce the operating
losses themselves. One can live with operating losses as long as they are temporary;
and the point of hedging, in such a case, is that it does provide the cash that tides
you over a bad patch. But if the problem is likely to be more than just temporary,
you need strategic changes in operations—for example, revising the marketing mix,
reallocating production, choosing new sourcing policies to reduce exposure, and
so on. Again, financial hedging just provides cash that eases the pain and helps
financing the adjustments; it does not solve the underlying problem.
In this respect, when making scenario projections about the possible future ex-
change rates, we should also make contingency plans for various possible future
exchange rates, including less likely ones. One can win crucial time if the response
has been talked through before; otherwise one wastes too much time deciding what
exchange-rate changes are “big” and “structural” or not, what the available options
are, not to mention who should be on the “task force” that ruminates on all this,
and so on and so forth.
This finishes our discussion of economic exposures. We now turn to translation
exposure.
13.4 Accounting Exposure
TheV ̃Tentry in the exposure definition has been interpreted, thus far, as the portfo-
lio of contractualfc-denominated undertakings inherited from the past, or a portfo-
lio of activities that need continuous decisions influenced by, amongst other things,
exchange rates. The third definition we discuss is the firm’s accounting value. This
accounting value may be affected by exchange rates in two ways. First, the firm may
have contractual exposures which the firm is alsomarking to market, thus adjusting
their book values to the rates that prevail on the valuation date. Second, the firm
may have foreign subsidiaries, and thehcvalue of theirnet worth, in the account-
ing sense of the word, probably depends to some extent on the exchange rate that
prevails on the consolidation date.