IFIMAN-B+Discussion+Class+Slides+Session+2

IFIMAN-B+Discussion+Class+Slides+Session+2 - IFIMAN-B...

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IFIMAN-B Session 2 Spring Honours School 4 October 2010 Managing Exchange Rate Risk 1. Transaction Exposure Techniques to eliminate Transaction Exposure Futures Hedge Forward Hedge Money Market Hedge Currency Option Hedge 2. Economic Exposure 3. Translation Exposure
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Transaction Exposure Transaction exposure exists when the future cash transactions of a firm are affected by exchange rate fluctuations. When transaction exposure exists, the firm faces three major decisions: Identifying its degree of transaction exposure, Deciding whether to hedge its exposure, and Choosing which hedging technique to use if it decides on hedging.
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Identifying Net Transaction Exposure Centralized Approach - A centralized group consolidates subsidiary reports to identify, for the MNC as a whole, the expected net positions in each foreign currency for the upcoming period(s). Note that sometimes, a firm may be able to reduce its transaction exposure by pricing some of its exports in the same currency as that needed to pay for its imports.
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Techniques to Eliminate Transaction Exposure Hedging techniques include: Futures hedge, Forward hedge, Money market hedge, and Currency option hedge. MNCs will normally compare the cash flows that could be expected from each hedging technique before determining which technique to apply.
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Techniques to Eliminate Transaction Exposure A futures hedge involves the use of currency futures. These are standardised and sold in fixed units. To hedge future payables, the firm may purchase a currency futures contract for the currency that it will be needing. To hedge future receivables, the firm may sell a currency futures contract for the currency that it will be receiving.
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Transaction Exposure A forward hedge differs from a futures hedge in that forward contracts are used instead of futures contract to lock in the future exchange rate at which the firm will buy or sell a currency.
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This note was uploaded on 10/21/2010 for the course ERW 12212222 taught by Professor Marks during the Spring '10 term at Charleston.

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IFIMAN-B+Discussion+Class+Slides+Session+2 - IFIMAN-B...

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