| Course | FIN-3340 International Finance |
|---|---|
| Module | Module 4 |
| Paper type | Written assignment 4: foreign exchange exposure |
| Length | About 608 words, 5 pages |
| Format | APA 7 student paper |
| School | Thomas Edison State University |
| Program | B.S.B.A. in Finance |
| Updated | October 2026 |
Free sample paper for FIN 3340 Module 4
Three Kinds of Exposure: Hedging a Peso Receivable and Planning for a Chilean Subsidiary
Student Name
B.S.B.A. in Finance, Thomas Edison State University
FIN-3340: International Finance
Mentor Name
Month Day, Year
Three Kinds of Exposure: Hedging a Peso Receivable and Planning for a Chilean Subsidiary
Three Kinds of Exposure
Eiteman et al. (2022) stress that transaction and operating exposures affect cash, while translation exposure affects reported numbers, which may matter for covenants and investors but does not by itself change cash. Froot et al. (1993) link the value of managing exposure to a firm's need for internal cash to fund investment, which shapes how much exposure the oven maker should hedge.
| Exposure | What it affects | Raritan's example |
|---|---|---|
| Transaction | Contracts already signed in a foreign currency | The CLP 1.14 billion receivable due in 180 days |
| Operating (economic) | Future cash flows and competitiveness | Future oven sales to Chile and competition from European makers |
| Translation (accounting) | Reported consolidated statements | The planned Chilean subsidiary's peso balance sheet |
Transaction Exposure: Four Alternatives
Using a spot rate of CLP 950, Chilean 180-day rates of 7.6 percent and U.S. rates of 4.4 percent:
The money market hedge produces exactly the forward's result, as interest rate parity implies it must. Its advantage is that Raritan receives dollars today, which it could use to pay down its own bank line; its disadvantage is that it requires access to peso borrowing, which a small exporter may lack.
| Alternative | How it works | Dollars received in 180 days |
|---|---|---|
| Remain unhedged | Convert at the future spot rate | Unknown: $1.14 million at 1,000, $1.27 million at 900 |
| Forward | Sell pesos forward at 964.87 | $1,181,503, certain |
| Money market hedge | Borrow CLP 1,098,265,896 today (the present value of the receivable at 3.8% for 180 days), convert to $1,156,069, invest at 2.2%; repay the loan with the receivable | $1,181,503, certain |
| Put option, strike 960 | Right to sell pesos at 960, premium cost about $18,204 at expiration | At least $1,169,296; more if the peso strengthens |
Operating Exposure
A sustained weakening of the peso would make Raritan's ovens more expensive in Chile, even with no contract outstanding, and could shift bakery chains toward Italian or German competitors whose currencies also move against the peso. That is operating exposure, and it cannot be hedged with a single forward because the amounts and dates are uncertain. Raritan can manage it through operations: sourcing some components in pesos, such as local installation services, so costs fall when revenue falls; pricing flexibly; and building a service business whose value comes from proximity rather than price. Allayannis and Weston (2001) found that firms using currency derivatives were valued more highly, but operating hedges matter as much for exposures that run beyond a single contract.
Translation Exposure
If Raritan opens a Chilean service subsidiary with net assets of CLP 2.85 billion, about $3.0 million at 950, those assets are translated into dollars at the current rate each reporting date. A decline in the peso to 1,000 would reduce their dollar value to $2.85 million, a translation loss of $150,000. Under U.S. rules for a Chilean unit that keeps its books in pesos, the loss is reported in other comprehensive income, not net income, so it does not reduce reported earnings, but it does reduce equity. Raritan could reduce the exposure by financing the subsidiary with peso borrowing, so that peso liabilities offset peso assets.
Recommendation
Raritan should hedge the receivable with a forward, since certainty matters for a sale of this size relative to its income, unless its bank offers peso borrowing on good terms, in which case the money market hedge gives the same result with earlier cash. For operating exposure, it should develop peso-denominated costs and a service business in Chile. For translation exposure, it should finance any subsidiary partly in pesos and explain the accounting effect to its lender in advance.
References
Allayannis, G., & Weston, J. P. (2001). The use of foreign currency derivatives and firm market value. Review of Financial Studies, 14(1), 243-276. https://doi.org/10.1093/rfs/14.1.243
Eiteman, D. K., Stonehill, A. I., & Moffett, M. H. (2022). Multinational business finance (16th ed.). Pearson.
Froot, K. A., Scharfstein, D. S., & Stein, J. C. (1993). Risk management: Coordinating corporate investment and financing policies. Journal of Finance, 48(5), 1629-1658. https://doi.org/10.1111/j.1540-6261.1993.tb05123.x
FIN 3340 Module 4 instructions, in plain terms
The fourth module sorts currency exposure into its three kinds. Expect questions distinguishing transaction, operating and translation exposure and problems comparing hedging alternatives for a receivable or payable: forward, money market hedge, option and remaining unhedged. Operating exposure and translation methods typically appear as short analyses. Froot, Scharfstein and Stein's argument for hedging to protect investment funds frames the recommendation. Figures here are illustrative composites. Expect to distinguish transaction, operating and translation exposure and recommend how to manage each. Questions often use a parent with a foreign subsidiary. Expect a numerical example for each exposure type.
Inside the FIN 3340 Module 4 example
The paper defines the three exposures in a table with the firm's own example of each. A second table compares four alternatives for the receivable, with the money market hedge computed step by step and shown to equal the forward. The operating exposure section explains why contracts cannot hedge it and lists operational responses, with research on derivatives use. The translation section computes the loss on a subsidiary's net assets and explains where it is reported, and the recommendation addresses each exposure in turn. Each exposure is illustrated with the company's own figures. Recommendations differ for each exposure type. A short table shows each exposure's effect on cash and on reported earnings.
FIN 3340 Module 4 rubric: what earns full marks
Each of the three exposures must be measured for Raritan to earn full credit. Mentors look for a clear distinction among the three exposures, correct hedging calculations including the money market hedge and recommendations matched to each type. Recognizing that translation losses affect equity but not cash, and that operating exposure needs operational responses, shows the understanding the module is built to develop. APA citations of the text and research are required. Answers that explain why operating exposure needs operational responses, not just financial hedges, show depth. Accurate examples of each exposure, with numbers, earn the most credit. Mentors also value recognition that translation exposure affects reported results but not cash directly. Papers that measure each type of exposure for the firm, and propose operational as well as financial hedges, show the full range of the module.
FIN 3340 Module 4 help: mistakes that cost marks
Exposure papers lose points for treating translation losses as cash losses, for setting up the money market hedge by borrowing the full receivable rather than its present value and for proposing a forward to hedge operating exposure. Classify each exposure first. Discount the receivable at the foreign rate before converting. Show that the money market hedge equals the forward. Recommend operational steps for operating exposure. A free first sample of your own FIN-3340 Module 4 assignment is available on request. Avoid treating translation losses as cash losses; explain what each exposure does to cash. Name a hedge or operational step for each exposure you identify.
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FIN 3340 Module 4 questions, answered
Where can I find a free FIN 3340 Module 4 sample paper?
The deck oven exporter paper above compares four hedges for a peso receivable, including a money market hedge, and explains operating and translation exposure.
What is a money market hedge?
Borrowing the foreign currency's present value today, converting it at spot and investing it, then repaying the loan with the foreign receivable.
What is the difference between transaction and translation exposure?
Transaction exposure affects cash on contracts already signed; translation exposure affects reported values when foreign statements are converted.
How can firms manage operating exposure?
Through operational choices such as local sourcing, flexible pricing and spreading production across currencies.
Where are translation gains and losses reported?
For subsidiaries using the current rate method, in other comprehensive income within equity, not in net income.