Week_9 Managing Transaction exporsure (New) - Chapter 11 12 Foreign Exchange Risk Management Managing Transaction Exposure Week-08-1 Contents

Week_9 Managing Transaction exporsure (New) - Chapter 11 12...

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Week -08-1 Foreign Exchange Risk Foreign Exchange Risk Management Management Managing Transaction Exposure Chapter 11 & 12
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Week -08-2 Contents Contents Transaction exposure Internal hedges - Multinational netting and leading/lagging Financial market hedges - Currency forwards, futures, options, swaps, and money market hedges Treasury management
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Week -08-3 Transaction exposure Transaction exposure From Last lecture notes - Transaction exposure exists when the future cash transactions of a firm are affected by exchange rate fluctuations. - Three tasks Identify its degree of transaction exposure. Decide whether to hedge this exposure. Choose a hedging technique if it decides to hedge part or all of the exposure.
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Week -08-4 Managing transaction exposure Managing transaction exposure Internal Management - Pricing (pricing exports in the same currency that firm use to pay for its imports) - multinational netting (currency diversification) - leading and lagging External Management (use of financial markets) - currency forwards - futures - options - swaps - money market hedges
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Week -08-5 German subsidiary U.S. subsidiary U.K. parent £100m Cross exchange rates €1.5000/£ $1.2500/£ $0.8333/€ £200m $75m $125m €150m €60m Multinational netting Butler / Multinational Finance Chapter
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Week -08-6 German subsidiary U.S. subsidiary U.K. parent £100m £200m £60m £100m £100m £40m Cash flows before netting Butler / Multinational Finance
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Week -08-7 German subsidiary U.S. subsidiary U.K. parent £60m £140m Cash flows after netting Butler / Multinational Finance
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Week -08-8 Leading and lagging Leading and lagging Leading and lagging refers to altering the timing of cash flows within the firm to offset foreign exchange exposures For example: - Leading - If a parent firm is short euros, it can accelerate euro payments from its subsidiaries - Lagging - If a parent firm is long euros, it can delay euro payments from its subsidiaries
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Week -08-9 -€10 million +€7.5 million +€7.5 million +€7.5 million -€10 million -€10 million Jan Feb Mar Apr June May July Aug -€10 million +€7.5 million +€7.5 million +€7.5 million -€10 million -€10 million Jan Feb Mar Apr June May July Aug Leading Lagging Leading/lagging when cash flows do not align Butler / Multinational Finance
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Week -08-10 Rates of return within the firm Rates of return within the firm Leading and lagging - creates an internal loan from one unit of the firm to another - can be beneficial to the firm, but - it can distort the rates of return earned by the various affiliates The firm can charge the market rates of interest on these intra-company deposits and loans to overcome this
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Week -08-11 Managing transaction exposure Managing transaction exposure Un-hedged Position Un-hedged Position Future FX Receipt - Today: do nothing - FX receipt date: sell FX at that day’s spot rate Future FX Payment - Today: do nothing - FX payment date: buy FX at that day’s spot rate The hedge-versus-no-hedge decision can be made by comparing the known result of hedging to the possible results of remaining un-hedged.
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  • Spring '17
  • Forward contract, Money Market Hedge

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