Transaction exposure.pptx

# Currency movement locking the exchange rate buysell

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currency movement – locking the exchange rate (buy/sell foreign currency now at a more favourable exchange rate). b. Applicable: Sell forward £1 million at 90 days i. You enter into a forward contract today to receive R19mln at 90 days in exchange for £1mln at the spot rate of £1/R19 ii. When the British importer pays £1mln in 90 days, you deliver the £1mln to your bank in exchange for R19mln

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Currency option hedge a. An option to buy (“call option”) or sell (“put option”) a specific amount of foreign currency at a specific time in order to protect against foreign currency risk. b. Applicable: Purchase a put option (in this case): an option to sell £1mln (R19mln at the spot rate of £1/R19) at 90 days in exchange for R19mln if the £ depreciates. If it appreciates, do not exercise the option and receive more R. i. if £1/R16 at 90 days, then £1mln = R16mln– so you exercise the option contract ii. if, e.g., £1/R20 at 90 days, then £1mln = R20mln – do not exercise the option contract and exchange the payment in £ at the exchange rate of £1/R20
Money market hedge a. Borrowing and lending in the domestic and foreign money markets – another way of locking the exchange rate, but without forward market hedge fee. b. Applicable: How it would work, assuming no interest rates: i. Borrow £1mln from the bank ii. Convert £1mln at the spot rate of £1/R19 and get R19mln iii. Invest the R19mln iv. At 90 days, pay back the loan of £1mln from the £1mln paid by the British importer; cash in your investment of R19mln. v. You have received R19mln and paid £1mln – you have effectively locked a £1mln/R19mln = £1/R19 exchange rate

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Swap contract a. An agreement to exchange currencies at specified rates and on a specified date or

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