Springfield Company is based in the US, which means its currency is US dollars while the customers in London, England uses the British Pound Sterling as a currency. The company will be affected to some extent by the conversion of the two currencies will cost some amount, which will reduce the income earned in London as compared with that earned in the US. The technique to use is to understand the pair of the two currencies used in both countries. The company will use the technique by observing three steps. The three steps will help the company to understand the exchanged rates charged in the market and the banks. The first step is finding the market exchange rate by comparing the two currencies such as it can understand the pair of currency it is working with in the market (Gordon et al. 841). Springfield Company should compare US dollars with the British Pound Sterling. The next step is finding the exchanged rate charged in the bank offering the service. The third step is dividing the two exchange rates to have the percentage markup. The percentage markup will help the company to understand the relation between quarterly percentage change of the total cash flows and the British Pounds Sterling.
Macro-exposure is the sharp increase in the foreign exchange rates experienced by organizations undertaking businesses in different countries, which uses different currencies. Changes in the foreign exchange rate will affect the cash flows in organizations operating internationally due to changes in activities undertaken, the nature of stocks, and characteristics of the business (Goldstein, Hao, and David 594). When a firm is faced with the macro-exposure exchange rate, the first step is to understand the cause of the macro-exposure such that it can adjust the specific areas of the business that caused the problem. The firm might increase the prices in the market or reduce the costs of production such that it can recover the losses in the exchange rates.
True, as the purchase of the currency forward will help the company to reduce the level of economic exposure in the market. The company will enter into a binding contract, which will lock the exchange rates sale or purchase of currency in the future (Gordon et al. 856). In such a situation, the company will continue buying and selling at the same exchange rate despite the weakness in the foreign currency.
POINT is right that MNC can reduce the impact of translation exposure through communication. The earnings made by the company will help in determining the expected future cash flows of MNC. With such anticipation that exchange rates will be experienced, communication will help the organization to make adjustments, which will reduce the impacts of translation exposure (Goldstein, Hao, and David 608). For example, if the previous reports show that certain impacts of translation exposure based on the earnings, communicating will be based on the findings and adjustments made in advance.
Goldstein, Itay, Hao Jiang, and David T. Ng. “Investor flows and fragility in corporate bond funds.” Journal of Financial Economics 126.3 (2017): 592-613.
Gordon, Elizabeth A., et al. “Flexibility in cash-flow classification under IFRS: determinants and consequences.” Review of Accounting Studies 22.2 (2017): 839-872.