International Banking and Finance Assignment

There are three possible currency exposure Chipotle may face when entering into the Chilean market. Such a exposure are called transaction exposure, economic exposure and translation exposure. In this first part of the paper I’ll give a definition of each of these threats as well as a strategy to minimize each of those.

Transaction exposure refers to the company will face when acquiring financial contractual obligations in a foreign currency. This type of exposure could easily happen since all currencies are very volatile. For example, Chipotle will have to sign a store lease for certain amount of Chilean pesos, this shouldn’t be a problem once a price is agreed and then calculated on Chipotle expenses if the currency exchange remains the same, but this is this is rarely the case. The problem starts if the US Dollar weakness against the Chilean peso because it will translate into more US dollars to pay for that particular lease. In another scenario, this fluctuation of currencies could become for the company since the US dollar value may perhaps rise against the Chilean peso. Although, some companies are more pros to take the risk, Chipotle shouldn’t consider this to be suitable. Therefore, in order to minimize the transaction exposure, Chipotle will use a hedging strategy call the forward market hedge.

Forward market hedge, is a strategy that involves a company, in this case Chipotle and a financial institution, for instance a bank. These two parties will sign a forward contract locking a particular exchange rate to be delivered on a future day; therefore in this case, chipotle will be locking the expense of the mentioned lease agreement. The offset of this method shows if the foreign currency depreciates since Chipotle would had to sent less US dollars to pay for the lease.