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Kopetsky Co. has net receivables in several currencies that are highly correlated with each...

Question:

Kopetsky Co. has net receivables in several currencies that are highly correlated with each other.

1. What does this imply about the firm's overall degree of transaction exposure?

2. Are currency correlations perfectly stable over time?

3. What does your answer imply about Kopetsky Co. or any other firm using past data on correlations as an indicator for the future?

Net Receivables:

The total sum of money owed to a company by its customers deducted by the amount of money owed that will likely never be paid. This is often presented into percentage form.

Answer and Explanation:

A- Inter-relation of all the currencies means the transaction exposure is high which means no possibility of offset effect. A significant decline in any one currency results in depreciation of others due to which value of net receivables decreases.

B- Currency correlations are not perfectly stable over time which means past correlations will not perfectly predict future correlations.

C- Firms cannot be dependent on the past correlations for accurately estimating future correlations. There can be a use of historical data if some stability exists in the general ranking of correlations.


Learn more about this topic:

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Receivables Management: Definition & Purpose

from Accounting 101: Financial Accounting

Chapter 7 / Lesson 4
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