Forecast Paper

Introduction

As business becomes more increasingly global, it's very important that countries pay close attention to foreign exchange exposures in order to design ways of implementing appropriate strategies to properly deal with these types of exposures. In this paper I will attempt to forecast the degree of transaction, translation and the economic exposure for Russia. I will follow that by forecasting the degree of these specific areas and analyzing the various techniques used to mitigate these exposures. The goal of this paper is to identify a few concepts of transaction, translation, and economic exposure for international operations in Russia.

Economic Exposure

It is conventional to classify foreign currency exposures into three types. The first is what is known as Economic Exposure. Economic Exposure is defined as the extent to which the value of the firm would be affected by unanticipated changes in exchange rates. Any anticipated changes in exchange rates would have been already discounted and reflected in the firm 's value. Changes in exchange rates can have a profound effect on the firm 's competitive position in the world market and thus on its cash flows and market value. (McGraw Hill, 2003). Changes in the exchange rate will also affect how a country forecast its dollar value. How has Economic Exposure affected Russia recently? In the Russian newspaper, Gateway To Russia, in March of 2004 it reported that the US dollar rose despite forecast. This was the reaction of traders to the dollar's strengthening on the world market. However, there is little optimism about

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the American currency both in Russia and abroad. The newspaper reported that according to market traders, the dollar would weaken soon. The euros exchange rate against the US dollar dropped to 1.2194 EUR/USD. The dollar continued to strengthen and the European currency dropped to a three-month low of $1.2056 affecting the Russian Market. Russian market traders said the ruble's exchange rate is based on a basket of currencies, which means that the Central Bank would not take strong measures to prevent the dollar strengthening. Russian banks used to close positions expecting the weakening of the US currency. But this time they did not do so. As a result, the dollar's exchange rate rose RUR 0.05 to 28.6 RUR /USD on the Moscow Inter-bank Currency Exchange (MICEX), and it rose further to 28.645 RUR/USD later. The Central Bank helped ease the pressure on the market by selling and estimated 1 billion at28.635. This is one example of how countries like Russia keep close attention to economic exposures forecasting and attempting to implement appropriate strategies to properly deal with them.

Transaction Exposure

Transaction Exposure is defined as the sensitivity of realized domestic currency values of the firm 's contractual cash flows denominated in foreign currencies to unexpected exchange rate changes. (The McGraw-Hill, 2003) Firms are subject to transaction exposure when it faces contractual cash flows that are fixed in foreign currencies. Unlike economic exposure, transaction exposure is well defined. The magnitude of transaction exposure is the same as the amount of foreign currency that is receivable or payable.

There are various financial contracts and operational techniques used to mitigate transaction exposure, some of which include, forward market-hedging, money market

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hedging, lead/lag strategizing, and exposure netting. Lending and borrowing in domestic and foreign money markets can also hedge transaction exposure. A firm may borrow or lend in foreign currency to hedge its foreign currency receivables or payables, thereby matching its assets or liabilities in the same currency. This will help eliminate the exchange exposure.

Russia attempted