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:
- Export Sales: $500,000
- Import Purchases: $300,000
- Interest Payment on Loan: $50,000
- Dividend Receipt from Subsidiary: $100,000
Calculate the Net Transaction Exposure.
Solution:
Net Exposure Calculation
| Step 1: Identify Inflows (+) | |
| Add: Exports | + 500,000 |
| Add: Dividend Receipt | + 100,000 |
| Total Inflows (A) | + 600,000 |
| Add: Step 2: Identify Outflows (-) | |
| Add: Imports | - 300,000 |
| Add: Interest Payment | - 50,000 |
| Total Outflows (B) | - 350,000 |
| Add: Step 3: Net Exposure (A - B) | |
| Add: Net Long Exposure (Surplus) | + 250,000 |
- 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:
-
With Hedging (Forward):
- Lock in rate at ₹81.
- Cost = $100,000 * 81 = ₹81,00,000.
- (Certainty).
-
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! 🎯
Test Your Knowledge
Question 1 of 4
1. If Total Inflows = $1M and Total Outflows = $1.2M, the firm has a: