Hedging through Invoice Currency o The firm can shift, share, or diversify shift exchange rate risk o by invoicing foreign sales in home currency share exchange rate risk e by pro-rating the currency of the invoice between foreign and home currencies a diversify exchange rate risk o by using a market basket index McGraw-Hilylrwoin 13-15 Copyright@ 2001 by The McGraw-Hill Companies, Inc. All rights
McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 13-15 Hedging through Invoice Currency ⚫ The firm can shift, share, or diversify: ◼ shift exchange rate risk ◆by invoicing foreign sales in home currency ◼ share exchange rate risk ◆by pro-rating the currency of the invoice between foreign and home currencies ◼ diversify exchange rate risk ◆by using a market basket index
Hedging via Lead and Lag If a currency is appreciating, pay those bills denominated in that currency early; let customers in that country pay late as long as they are paying in that currency If a currency is depreciating, give incentives to customers who owe you in that currency to pay early; pay your obligations denominated in that currency as late as your contracts will allow McGraw-Hilylrwoin 13-16 Copyright@ 2001 by The McGraw-Hill Companies, Inc. All rights
McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 13-16 Hedging via Lead and Lag ⚫ If a currency is appreciating, pay those bills denominated in that currency early; let customers in that country pay late as long as they are paying in that currency. ⚫ If a currency is depreciating, give incentives to customers who owe you in that currency to pay early; pay your obligations denominated in that currency as late as your contracts will allow
Exposure Netting a multinational firm should not consider deals in isolation, but should focus on hedging the firm as a portfolio of currency positions As an example, consider a u.s. -based multinational with Korean won receivables and Japanese yen payables. Since the won and the yen tend to move in similar directions against the U.S. dollar. the firm can just wait until these accounts come due and just buy yen with won Even if it's not a perfect hedge, it may be too expensive or impractical to hedge each currency separately McGraw-Hilylrwoin 13-17 Copyright@ 2001 by The McGraw-Hill Companies, Inc. All rights
McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 13-17 Exposure Netting ⚫ A multinational firm should not consider deals in isolation, but should focus on hedging the firm as a portfolio of currency positions. ◼ As an example, consider a U.S.-based multinational with Korean won receivables and Japanese yen payables. Since the won and the yen tend to move in similar directions against the U.S. dollar, the firm can just wait until these accounts come due and just buy yen with won. ◼ Even if it’s not a perfect hedge, it may be too expensive or impractical to hedge each currency separately