Exposure Calculation Problems – Simple Numerical Examples

Calculating exposure is about simple arithmetic: Inflows minus Outflows.

Problem 1: Calculate Net Exposure

Question: An Indian MNC has the following expected transactions in US Dollars ($) for the next quarter:

1. Export Sales: $500,000
2. Import Purchases: $300,000
3. Interest Payment on Loan: $50,000
4. Dividend Receipt from Subsidiary: $100,000

Calculate the Net Transaction Exposure.

Solution:

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• Interpretation: The firm is "Long" on Dollars. If Dollar falls, firm loses. It should hedge by Selling Forward.

Problem 2: Hedging Outcome

Question:

• Net Exposure: Pay $100,000 (Short Position).
• Current Spot: ₹80.
• 3-Month Future Spot (Scenario): ₹82.
• Forward Rate Available: ₹81.
• Compare: Cost with Hedging vs Without Hedging.

Solution:

1. With Hedging (Forward):

   • Lock in rate at ₹81.
   • Cost = $100,000 * 81 = ₹81,00,000.
   • (Certainty).

2. Without Hedging (Wait & See):

   • Pay at market rate in 3 months (₹82).
   • Cost = $100,000 * 82 = ₹82,00,000.
   • (Uncertainty).

Conclusion: Hedging saved the firm ₹1,00,000 (82L - 81L).

Exam Notes: Tips

• Long vs Short:
  • Long: Inflows > Outflows (Net Receiver). Fear: Depreciation.
  • Short: Outflows > Inflows (Net Payer). Fear: Appreciation.

Quiz Time! 🎯

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