《国际财务管理》（英文版） Chap13 Management of Transaction Exposure

Chapter Thirteen Management of Transaction Exposure 13 Chapter objective This chapter discusses various methods available for the management of transaction exposure facing multinational firm

INTERNATIONAL FINANCIAL MANAGEMENT EUN / RESNICK Second Edition 13 Chapter Thirteen Management of Transaction Exposure Chapter Objective: This chapter discusses various methods available for the management of transaction exposure facing multinational firms

Chapter outline ● Forward market Hedge o money market hedge ● Options market hedge Cross-Hedging Minor Currency Exposure o Hedging Contingent Exposure o Hedging Recurrent Exposure with Swap Contracts McGraw-Hilylrwoin 13-1 Copyright@ 2001 by The McGraw-Hill Companies, Inc. All rights

McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 13-1 Chapter Outline ⚫ Forward Market Hedge ⚫ Money Market Hedge ⚫ Options Market Hedge ⚫ Cross-Hedging Minor Currency Exposure ⚫ Hedging Contingent Exposure ⚫ Hedging Recurrent Exposure with Swap Contracts

Chapter Outline(continued) o Hedging Through Invoice Currency o Hedging via Lead and Lag ● Exposure Netting Should the Firm Hedge? o What risk management products do Firms use? McGraw-Hilylrwoin 13-2 Copyright@ 2001 by The McGraw-Hill Companies, Inc. All rights

McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 13-2 Chapter Outline (continued) ⚫ Hedging Through Invoice Currency ⚫ Hedging via Lead and Lag ⚫ Exposure Netting ⚫ Should the Firm Hedge? ⚫ What Risk Management Products do Firms Use?

Forward Market Hedge o If you are going to owe foreign currency in the future, agree to buy the foreign currency now by entering into long position in a forward contract If you are going to receive foreign currency in the future, agree to sell the foreign currency now by entering into short position in a forward contract McGraw-Hilylrwoin 13-3 Copyright@ 2001 by The McGraw-Hill Companies, Inc. All rights

McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 13-3 Forward Market Hedge ⚫ If you are going to owe foreign currency in the future, agree to buy the foreign currency now by entering into long position in a forward contract. ⚫ If you are going to receive foreign currency in the future, agree to sell the foreign currency now by entering into short position in a forward contract

Forward Market Hedge: an Example You are a U.s. importer of british woolens and have just ordered next years inventory Payment of loom is due in one year Question: How can you fix the cash outflow in dollars Answer: One way is to put yourself in a position that delivers flooM in one year-a long forward contract on the pound McGraw-Hilylrwoin 13-4 Copyright@ 2001 by The McGraw-Hill Companies, Inc. All rights

McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 13-4 You are a U.S. importer of British woolens and have just ordered next year’s inventory. Payment of £100M is due in one year. Question: How can you fix the cash outflow in dollars? Forward Market Hedge: an Example Answer: One way is to put yourself in a position that delivers £100M in one year—a long forward contract on the pound

Money market hedge o This is the same idea as covered interest arbitrage McGraw-Hilylrwoin 13-5 Copyright@ 2001 by The McGraw-Hill Companies, Inc. All rights

McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 13-5 Money Market Hedge ⚫ This is the same idea as covered interest arbitrage

Money market hedge The importer of British woolens can hedge his i100 million payable with a money market hedge Borrow s112.05 million in the U.S Translate $112.05 million into pounds at the spot rate S(S/f) $1.25/￡ Invest t89.64 million in the UK at i t=11. 56%for one year In one year your investment will have grown to f100 million Spot exchange rate S($/f) $1.25/￡ 360-day forward rate o($/f)|=$120/￡ 360 U.S. discount rate 7.10 British discount rate 11.56% McGraw-Hilylrwoin 13-6 Copyright@ 2001 by The McGraw-Hill Companies, Inc. All rights

McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 13-6 Money Market Hedge The importer of British woolens can hedge his £100 million payable with a money market hedge: Borrow $112.05 million in the U.S. Translate $112.05 million into pounds at the spot rate S($/£) = $1.25/£ Invest £89.64 million in the UK at i£= 11.56% for one year. In one year your investment will have grown to £100 million. Spot exchange rate S($/£) = $1.25/£ 360-day forward rate F360($/£) = $1.20/£ U.S. discount rate i$ = 7.10% British discount rate i£ = 11.56%

Money market hedge Where do the numbers come from? We owe our supplier f100 million in one year-so we know that we need to have an investment with a future value of f100 million Since i 11.56%we need to invest f89.64 million at the start of the year ?00 ?964= 1.1156 How many dollars will it take to acquire f89.64 million at the start of the year if the spot rate s($/f)=$1.25/f? $1.00 $11205=?964× ?25 McGraw-Hilylrwoin 13-7 Copyright@ 2001 by The McGraw-Hill Companies, Inc. All rights

McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 13-7 Money Market Hedge Where do the numbers come from? We owe our supplier £100 million in one year—so we know that we need to have an investment with a future value of £100 million. Since i£= 11.56% we need to invest £89.64 million at the start of the year. How many dollars will it take to acquire £89.64 million at the start of the year if the spot rate S($/£) = $1.25/£? 1.1156 ?00 ?9.64 = ?.25 $1.00 $112.05 = ?9.64 

Money market hedge Suppose you want to hedge a payable in the amount of￡ y with a maturity of i. Borrow Sx at t=0 on a loan at a rate of is per year (Note that Sx= fy(1+ie)at the spot rate. ii. Exchange Sx for Ey/(1+ ie)at the prevailing spot rate invest ty/(1+itat if for the maturity of the payable to achieve￡y At maturity, you will owe a sx(1 + is) Your British investments will have grown enough to service your payable and you will have no exposure to the pound McGraw-Hilylrwoin 13-8 Copyright@ 2001 by The McGraw-Hill Companies, Inc. All rights

McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 13-8 Money Market Hedge Suppose you want to hedge a payable in the amount of £y with a maturity of T: i. Borrow $x at t = 0 on a loan at a rate of i$ per year. (Note that $x = £y/(1+ i£) T at the spot rate.) ii. Exchange $x for £y/(1+ i£) T at the prevailing spot rate, invest £y/(1+ i£) T at i£for the maturity of the payable to achieve £y. At maturity, you will owe a $x(1 + i$ ). Your British investments will have grown enough to service your payable and you will have no exposure to the pound

Money market hedge Suppose you want to hedge a f receivable in the amount of fy with a maturity of t' . Borrow fy(1+ie)at t=0 ii. Exchange Ey/(1+ie) for Sx at the prevailing spot rate At maturity, you will owe a Sy which can be paid with your receivable You will have no exposure to the dollar-pound exchange rate McGraw-Hilylrwoin 13-9 Copyright@ 2001 by The McGraw-Hill Companies, Inc. All rights

McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 13-9 Money Market Hedge Suppose you want to hedge a £ receivable in the amount of £y with a maturity of T: i. Borrow £y/(1+ i£) T at t = 0. ii. Exchange £y/(1+ i£) T for $x at the prevailing spot rate. At maturity, you will owe a $y which can be paid with your receivable. You will have no exposure to the dollar-pound exchange rate