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Discuss the concept of Currency Exposure Risk, Translation Exposure

DGP Inc. sells 100,000 Gizmos to a retailer in Europe for €100,000 (Euros) on terms of 30 Days from the date of Invoice. The current rate of the EUR/USD is 1.3868, therefore DGP Inc books the sale as an accounts receivable of US$138,680. Instructions

  1. Define and discuss the concept of Currency Exposure Risk, Translation Exposure, and Economic Exposure.
  2. If the exchange rate of EUR/USD was 1.2868 in 30 days, what would be the impact on the company’s Profit and Loss at the time of the receipt of payment from the European customer? What would be the Economic exposure for the company? What would be the Translation Exposure if any? Include calculations.
  3. What would be the impact on the firm if the exchange rate was EUR/USD 1.4868 in 30 days? Discuss in relation to the three currency exposures in 2. Include calculations.
  4. How could DGP Inc. eliminate or reduce these exposure risks? Provide two hypothetical examples to support your answer.

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