International Finance Exposure
International Finance Exposure
University of Memphis
Popular in International Finance
Popular in Finance
This 3 page Class Notes was uploaded by Precious Notetaker on Tuesday April 26, 2016. The Class Notes belongs to at University of Memphis taught by Vivek Sharma in Spring 2016. Since its upload, it has received 22 views. For similar materials see International Finance in Finance at University of Memphis.
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Date Created: 04/26/16
International Finance Vivek Sharma written by Precious Fox Managing Exposure (Transaction, Translation, and Economic) Technique To Hedge Payables To Hedge Receivables Futures Purchase currency futures Sell a currency futures representing the currency and representing the currency and amount related to payables amount related to receivables Forwards Negotiate a forward contract to Negotiate a forward contract to purchase the amount of foreign sell the amount of foreign currency needed to cover the currency that will be received as payables a result of the receivables Money Market Borrow local currency and Borrow the currency convert to currency denominating the receivables, denominating payables. Invest convert it to the local currency, these funds until they are needed and invest it. Then pay off the to cover payables loan with cash inflows from receivables Currency Option Purchase a currency call option Purchase a currency put option representing the currency representing currency and amount related to payables amount related to receivables The chart aboves shows different ways risk can be hedge based on the type of technique it is and whether it is payables or receivables. When deciding whether to use a money market hedge or a forward, pick the one that would be more feasible for you. If the interest rate parity hold and there are no transaction costs, then the money market hedge will yield the same results. Important to remember: the forward premium reflects interest rate differential between two currencies. Type of Operation Recommended Action (When Recommended Action (When foreign currency has a greater foreign currency has a greater impact on cash inflows) impact on outflows) Sales in Foreign Currency Units Reduce Foreign Sales Increase Foreign Sales Reliance on Foreign Supplies Increase foreign supply orders Reduce foreign supply orders Proportion of debt structure Restructure debt to increase debt Restructure debt to reduce debt representing foreign debt payments in foreign currency payments in foreign currency Transaction exposure – exchange rate risk when converting net foreign cash inflows to US dollars or purchasing currencies to send payments Economic exposure – any impact of exchange rate fluctuations on a firm's future cash flows Translation Exposure – MNC translates subsidiary's financial data to its home currency for consolidated financial statements Operations restructuring involves shifting the sources of costs or revenue to other locations in order to match cash inflows and outflows in foreign currencies. Certain companies' future expenses are more senstiive than future recenue to the possible values of a forein currency. The company can reduce economic exposure by increasing sensitivity of revenue and decreasing sensitivity of expenses to ecvhange rate movements. Restructuring operations is more comple thatn feding for a currency transaction. Real Cost of Hedging = cost of hedging payables – cost of payables if not hedged Translated earnings = subsidiary earnings * weighted average exchange rate Gain on forward contract = (amount received from forward sale) – (amount paid to fulfill contract obligation) Limitations of Hedging Translation Exposure Include: Inaccurate Earnings Forecasts Inadequate Forward Contracts for Some Countries Accounting Distortions Increased Transaction Exposure
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