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“If the financial manager does want to hedge against the impact of translation risk, trying to make sure that foreign currency assets and liabilities are approximately equal in value is the simplest method. Then any gains or losses in asset values are offset by equivalent losses or gains in the values of the liabilities.
This can be achieved by funding foreign asset purchases by borrowing money in the same currency.”Sir I don’t understand how the above method is an efficient way to hedge translation risk? Aren’t assets anyway always equal to liabilities(given equity can be deemed as a part of liabilities)?
If a company has assets denominated in a foreign currency and they haven’t applied matching, then there will be an unrealised gain or loss each year as the exchange rate changes.
If they are matched by taking a loan in the same currency, then the two translation effects net off.
The financial manager is not normally interested in the transaction risk because it is not a ‘real’ gain or loss.
Yet again you are expecting me to repeat things that I explain in my lectures because you cannot be bothered to watch them.
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