How a KRW 100 Rise in the Dollar Exchange Rate Affects Operating Profit
Calculate currency sensitivity using dollar costs as well as export revenue. A hypothetical example distinguishes operating-flow exposure from revaluation effects on foreign-currency balances at the reporting date.
A simple estimate of operating sensitivity multiplies the exchange-rate change by net exposure: foreign-currency revenue less foreign-currency costs for the same period. Applying the rate increase to all exports can overstate the earnings benefit by overlooking imported inputs and overseas production costs.
Distinguish flows during the period from balances at the reporting date
A calculation based on annual revenue and costs measures sensitivity in future transaction flows. Exchange-rate changes affecting foreign-currency receivables and payables at the reporting date are a separate calculation relating to the revaluation of existing financial items. Do not automatically count the same receivable in both the annual revenue effect and the reporting-date revaluation effect. IAS 21 distinguishes foreign-currency transactions from the translation of foreign operations, so first identify the functional and presentation currencies. Reporting in KRW does not mean every business has the same currency risk measured in KRW.
State whether prices and volumes are held constant
A net-exposure calculation depends on unchanged foreign-currency prices, volumes, and cost structures. Results change if customers demand lower dollar prices after a currency move or overseas competitors adjust their prices too. If imported raw materials are held in inventory, the timing of their cost recognition can also differ from that of revenue. Match revenue and costs by currency; do not treat all nondollar currencies as dollars. Separately examine whether higher KRW-translated revenue at an overseas subsidiary means the same thing as increased cash receipts at the parent.
Read the scope of hedges and sensitivity disclosures
If forward exchange contracts exist, check their amounts, maturities, and exchange rates, and separate hedged from unhedged exposure. Accounting gains and losses and economic cash effects can be recognized at different times, so do not simply add the sensitivity figures in the notes to an operating profit forecast. IFRS 7 risk disclosures help identify the nature of the exposure; they do not mean the disclosed figures include all future company revenue. State the exposure period used and the contracts excluded from your analysis to define the estimate’s limits.
Worked example
Hypothetical example: Assume annual dollar revenue of USD 100 million, dollar costs of USD 60 million, and KRW-denominated fixed costs of KRW 30 billion. At KRW 1,300 per USD, the net dollar contribution of USD 40 million equals KRW 52 billion, giving operating profit of KRW 22 billion. With other conditions unchanged and the average exchange rate at KRW 1,400 per USD, net contribution becomes KRW 56 billion and operating profit KRW 26 billion, an increase of KRW 4 billion. Calculating only the revenue effect gives a KRW 10 billion increase but omits the KRW 6 billion increase in dollar costs. This is a simple operating model with no hedges, taxes, or revaluation gains and losses on foreign-currency debt.
What to check
- Check revenue and cost currencies and the functional currency.
- Distinguish the period’s average exchange rate from the reporting-date rate.
- Subtract corresponding foreign-currency costs from foreign-currency revenue.
- Avoid double counting hedge amounts and maturities or separate foreign-currency balances.
Sources and primary materials
This is educational material about research methods. For an actual company decision, verify the filings and primary sources for the relevant period.