Management ofTransaction ExposureChapter Six
ChapterObjective:This chapter discusses various methodsavailable for the management oftransactionexposurefacingmultinationalfirms
❖Chapter Objective: ❖This chapter discusses various methods available for the management of transaction exposure facing multinational firms
ThreeTypesofExposureTransaction ExposureExchange rate risk as applied to the realized homecurrency value of the firm's contractual cash flowsThe subject of Chapter 8.EconomicExposureExchange rate risk as applied to the firm's value. Thesubject of Chapter 9Translation ExposureExchange rate risk as applied to the firm's consolidatedfinancialstatements.ThesubjectofChapter10
❖Transaction Exposure ▪ Exchange rate risk as applied to the realized home currency value of the firm’s contractual cash flows. The subject of Chapter 8. ❖Economic Exposure ▪ Exchange rate risk as applied to the firm’s value. The subject of Chapter 9 ❖Translation Exposure ▪ Exchange rate risk as applied to the firm’s consolidated financial statements. The subject of Chapter 10 Three Types of Exposure
WhatisTransaction Exposure:anExampleYou are a U.S. importer of Britishwoolens and have just ordered nextyear's inventory. Payment of 100M isdue in one year.Question: what kind of exposure is it inthis case? How can you fix the cashoutflowindollars?
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: what kind of exposure is it in this case? How can you fix the cash outflow in dollars? What is Transaction Exposure : an Example
Different ways of hedgingFinancialcontractsForwardMarketHedgeMoney Market HedgeOptions Market HedgeSwapContractsOperational techniques Hedging Through Invoice Currency Hedging via Lead and LagExposure Netting
Different ways of hedging ❖Financial contracts ▪ Forward Market Hedge ▪ Money Market Hedge ▪ Options Market Hedge ▪ Swap Contracts ❖Operational techniques ▪ Hedging Through Invoice Currency ▪ Hedging via Lead and Lag ▪ Exposure Netting