Transaction Exposure There Are a Essay

As a result, these companies maintain foreign currency trading desks to hedge the transaction risk that they face as a consequence of such dealings (Myers, 2010).

In order to address its foreign currency transaction risk, some firms prefer to finance locally. McDonald's, for example, has a number of strategies that it uses to hedge its exposure to transaction risk. The company prefers, where possible, to finance locally and to purchase its supplies locally as well. This allows it to keep revenue in foreign countries, reducing the overall amount of transaction risk that it faces with such operating hedges. As a result, approximately 40% of the company's debt is denominated in foreign currencies, primarily the pound, euro, and the Australian and Canadian dollars. While this strategy still leaves McDonald's exposed to translation risk, it greatly reduces the firm's total transaction risk, because it reduces the overall percentage of transactions that involve foreign exchange (Gasparro & Stynes, 2011).

These examples show the different approaches that international companies take towards hedging exposure. For firms like Google, there is an imbalance between the company's cost structure (U.S. dollars) and its revenue streams that necessitate increased use of hedging to address its transaction risk. Companies that are able to enact operating hedges, such as McDonald's, often do so in order to reduce their total transaction risk. For other companies, they are compelled to hedge simply because they must engage in foreign currency transactions by necessity, and subsidiaries of foreign parents are among the firms most likely to face this situation.Reducing exposure is the first step, and if that cannot be achieved through the normal course of business, then it must be done via transactions in the foreign exchange markets.

Works Cited:

Gasparro, a. & Stynes, T. (2011). McDonald's 4Q profit rises 2.1% amid stronger sales. Nasdaq. Retrieved January 28, 2011 from http://www.nasdaq.com/aspx/stock-market-news-story.aspx?storyid=201101240852dowjonesdjonline000146&title=mcdonalds-4q-profit-rises-21amid-stronger-sales

Kelley, M. (2001). Foreign currency risk: Minimizing transaction exposure. Virginia Lawyer. Retrieved January 28, 2011 from http://www.vsb.org/docs/valawyermagazine/jj01kelley.pdf

Myers, R. (2010). The calm before reform. CFO Magazine. Retrieved January 28, 2011 from http://www.cfo.com/article.cfm/14526563?f=singlepage

Phillips, M. (2011). Interesting: Google's trading desk. Wall Street Journal. Retrieved January 28, 2011 from http://blogs.wsj.com/marketbeat/2011/01/28/interesting-googles-trading-desk/.....