TRANSACTION EXPOSURE BASED ON CURRENY VARIABILITY

In actual practice, MNC’s have their own method for developing exchange rate projections.

· Historical method

MNC’s can use the historical data for the past few years to assess the expected movement for each currency.

· Standard method

MNC’s use the standard deviation method very frequently to measure the degree of movement for each particular currency. The idea of this method is to assess & broadly identify some currencies which fluctuate more widely than others.

For example, during the period 1974-1989, it was found that the German mark had a standard deviation of about 6%, Canadian dollar of approx 2%, British pound & French franc of approx 5%. Based on the above information, a US based MNC’s may feel that an open asset or liability position in Canadian dollars is not as problematic as an open position in other currencies.

The standard deviation of a currency may change over time. Thus, a MNC may not be able to predict the future variability of a currency with perfect accuracy; it can only identify currencies whose values are most likely to be stable or highly variable in the future. Thus, assessing the currency variability over time helps an MNC to measure its transaction exposures.