Eun 9e International Financial Management PPT CH08 Accessible 1
Eun 9e International Financial Management PPT CH08 Accessible 1
Chapter Eight
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Chapter Outline
Three Types of Exposure
Should the Firm Hedge?
Hedging Foreign Currency Receivables
Hedging Foreign Currency Payables
Cross-Hedging Minor Currency Exposure
Hedging Contingent Exposure
Hedging Recurrent Exposure with Swap Contracts
Hedging through Invoice Currency
Hedging via Lead and Lag
Exposure Netting
What Risk Management Products Do Firms Use?
Summary
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Three Types of Exposure 1
Example
• Suppose a U.S. firm sold its product to a German client
on three-month credit terms and invoiced €1 million.
• When the U.S. firm receives €1 million in three months, it
will have to convert (unless it hedges) the euros into
dollars at the spot exchange rate prevailing on the
maturity date, which cannot be known in advance.
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Hedging Transaction Exposure
This chapter focuses on alternative ways of hedging
transaction exposure using various financial contracts and
operational techniques
Financial contracts
• Forward contracts, money market instruments, options
contracts, and swap contracts.
Operational techniques
• Choice of the invoice currency, lead/lag strategy, and
exposure netting.
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Should the Firm Hedge?
No consensus on the question of whether a firm should
hedge; Most arguments suggesting corporate exposure
management will not add value to the firm hold in the case
of a “perfect” capital market
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Forward Market Hedge 1
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Forward Market Hedge 2
a
The forward exchange rate (F) is $1.46/£ in this example.
b
The gains/losses are computed as the proceeds under the forward hedge minus the proceeds from the
unhedged position at the various spot exchange rates on the maturity date.
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Cross-Hedging Minor Currency Exposure
If a firm has positions in major currencies (for example,
British pound, euro, and Japanese yen), it can easily use
forward, money market, or options contracts to manage its
exchange risk exposure
However, if the firm has positions in less liquid currencies
(for example, Indonesian rupiah, Thai bhat, and Czech
koruna), it may be either very costly or impossible to use
financial contracts in these currencies
• In this situation, firms may use cross-hedging, which
involves hedging a position in one asset by taking
position in another asset.
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© 2021 McGraw Hill. All rights reserved. Authorized only for instructor use in the classroom.
No reproduction or further distribution permitted without the prior written consent of McGraw Hill.