Cash Flow Versus Accounting Exposures to Currency Risk

by Abraham George



The article focuses on the management of corporate exposure to currency risk in the context of floating exchange rates, in order to balance the losses due to cash flow and accounting. Introduction of the accounting requirement that exchange gains and losses be taken into income in each reporting period has diverted attention of management from the cash-flow implications of currency movements. Foreign exchange gains and losses arising from translation of foreign currency financial statements into dollars do not necessarily correspond to the cash-flow impact of rate changes. Furthermore, a management approach based purely on cash-flow considerations should try to eliminate the opportunity cost arising from the reduction in the dollar value of repatriated earnings.

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