Chapter Thirteen Management of Transaction Exposure 13 Chapter objective This chapter discusses various methods available for the management of transaction exposure facing multinational firm
INTERNATIONAL FINANCIAL MANAGEMENT EUN / RESNICK Second Edition 13 Chapter Thirteen Management of Transaction Exposure Chapter Objective: This chapter discusses various methods available for the management of transaction exposure facing multinational firms
Chapter outline ● Forward market Hedge o money market hedge ● Options market hedge Cross-Hedging Minor Currency Exposure o Hedging Contingent Exposure o Hedging Recurrent Exposure with Swap Contracts McGraw-Hilylrwoin 13-1 Copyright@ 2001 by The McGraw-Hill Companies, Inc. All rights
McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 13-1 Chapter Outline ⚫ Forward Market Hedge ⚫ Money Market Hedge ⚫ Options Market Hedge ⚫ Cross-Hedging Minor Currency Exposure ⚫ Hedging Contingent Exposure ⚫ Hedging Recurrent Exposure with Swap Contracts
Chapter Outline(continued) o Hedging Through Invoice Currency o Hedging via Lead and Lag ● Exposure Netting Should the Firm Hedge? o What risk management products do Firms use? McGraw-Hilylrwoin 13-2 Copyright@ 2001 by The McGraw-Hill Companies, Inc. All rights
McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 13-2 Chapter Outline (continued) ⚫ Hedging Through Invoice Currency ⚫ Hedging via Lead and Lag ⚫ Exposure Netting ⚫ Should the Firm Hedge? ⚫ What Risk Management Products do Firms Use?
Forward Market Hedge o If you are going to owe foreign currency in the future, agree to buy the foreign currency now by entering into long position in a forward contract If you are going to receive foreign currency in the future, agree to sell the foreign currency now by entering into short position in a forward contract McGraw-Hilylrwoin 13-3 Copyright@ 2001 by The McGraw-Hill Companies, Inc. All rights
McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 13-3 Forward Market Hedge ⚫ If you are going to owe foreign currency in the future, agree to buy the foreign currency now by entering into long position in a forward contract. ⚫ If you are going to receive foreign currency in the future, agree to sell the foreign currency now by entering into short position in a forward contract
Forward Market Hedge: an Example You are a U.s. importer of british woolens and have just ordered next years inventory Payment of loom is due in one year Question: How can you fix the cash outflow in dollars Answer: One way is to put yourself in a position that delivers flooM in one year-a long forward contract on the pound McGraw-Hilylrwoin 13-4 Copyright@ 2001 by The McGraw-Hill Companies, Inc. All rights
McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 13-4 You are a U.S. importer of British woolens and have just ordered next year’s inventory. Payment of £100M is due in one year. Question: How can you fix the cash outflow in dollars? Forward Market Hedge: an Example Answer: One way is to put yourself in a position that delivers £100M in one year—a long forward contract on the pound