Chapter 9 - Chapter9 TransactionExposure...

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Chapter 9 Transaction Exposure
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Foreign Exchange Exposure Foreign exchange exposure is the potential for firm value of a  MNE to change due to changes in exchange rates - cash flow changes  - asset value changes - liability value changes Foreign exchange exposure must be measured and managed by  MNE managers Foreign exchange exposure comprised of three exposures - Transaction exposure - Operating exposure - Translation exposure
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Types of Foreign Exchange  Exposure Transaction exposure: change in home currency  value  of cash flows resulting from existing contractual  obligations caused by exchange rate change Operating exposure: change in value of firm due to  change in actual future cash flows caused by  exchange  rate changes Translation exposure: change in equity due to  change in  home currency value of firm’s assets and liabilities 
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Transaction Exposure  Management Transaction exposure measures gains or losses in  home  currency value of  known  short-term future foreign  currency denominated cash flows caused by  exchange  rate changes - cash flows are locked in by contractual  obligation - a payable from or a receivable to a foreign firm - planned capital investment Transaction exposure can be  hedged  using forex 
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Transaction Exposure  Management Ex. Jefferson’s Airplanes has a contract to buy a  facility  in Belgium closing one year from now.  The  contract  price for the facility is €1M. Firm management  thinks  the exchange rate could be anywhere between  1.00 $/€  to 1.20 $/€ one year from now.  What is highest  and  lowest amount of dollars the firm will have to  expend 
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Transaction Exposure Hedging Operating hedge: balance global operations so  cash  flows going into and out of a country are similar Financial hedge: Maintain foreign currency in  foreign  country for future use Contractual hedge: use spot, forward, futures and  options markets to offset transaction exposure - Take forex position that is affected by  exchange rates in opposite direction as your  transaction exposure
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Chapter 9 - Chapter9 TransactionExposure...

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