foreign exchange eposure

[orit]

Hi David,
I would appreciate if you can explain this issue:

If the company has positive net exposure, (assets higher than liabilities) - depreciation of the foreign currency will be against the bank and increase the exposure.
If the company has negative net exposure (assets less than liabilities) - depreciation of the foreign currency will reduce the exposure?

Thanks,
Orit

 

[ShaktiRathore]

case i) (assets higher than liabilities) or A>L net assets=A-L, currency depreciates from 50$/FC to 40$/FC so that net assets goes from 50(A-L) to 40(A-L) by -10(A-L). This is a loss of 10(A-L).
B/S, suppose assets are 10 FC and Liabilities are 5 FC
Assets(in $)
50$/FC(10FC)=500
Liabilities(in $)
50$/LC(5FC)=250
Equity: 250

after depreciation of FC,

B/S
Assets(in $)
40$/FC(10FC)=400
Liabilities(in $)
40$/FC(5FC)=200
Equity: 200(loss of 50)


case ii) (assets less than liabilities) or A<L net assets=L-A, currency depreciates from 50$/FC to 40$/FC so that net Liabilities goes from 50(L-A) to 40(L-A) by 10(L-A). This is a gain of 10(A-L).
similarly , B/S, suppose assets are 5 FC and Liabilities are 10 FC
Assets(in $)
50$/FC(5FC)=250
Liabilities(in $)
50$/FC(10FC)=500
Equity: -250

after depreciation of FC,

B/S
Assets(in $)
40$/FC(5FC)=200
Liabilities(in $)
40$/FC(10FC)=400
Equity: -200(gain of 50)

hope u understood,
thanks

 

[orit]

thanks a lot for your reply, its clear now