Automobile Heading Strategy

Transaction exposure basically measures the extent to which financial obligations and commitments of the past are subject to the exchange rate risk. The greater the volatility of value of the financial contracts for the company in response to changes in exchange rates, the greater the transaction exposure for the company. Net transaction exposure for a company can only be estimated because there is no particular formula for calculation of the net transaction exposure. Transaction exposure directly affects the costs of raw materials purchased in currencies other than EURO. The values of financial commitments that the company makes in foreign currency change directly in response to currency fluctuation.

On the other hand, operational exposure measures the change in the value of the company due to change in future cash flows caused by currency rate fluctuations. In other words, this exposure measures the extent to which revenues and profitability are exposed to exchange rate risk. Operating exposure of BMW is much more significant that transaction exposure because a significant part of sales revenue is dominated in foreign currency and has to be converted into domestic currency. Operating exposure also measures the change in the competitive position of the company in response to change in the exchange rate. Although costs of new models launches for BMW increased significantly, the competitive position of the company did not change significantly due to high operational efficiency.