《International Financial Management》课程教学课件（PPT讲稿）Chapter 6 Management of Transaction Exposure

Management ofTransaction ExposureChapter Six

ChapterObjective:This chapter discusses various methodsavailable for the management oftransactionexposurefacingmultinationalfirms

❖Chapter Objective: ❖This chapter discusses various methods available for the management of transaction exposure facing multinational firms

ThreeTypesofExposureTransaction ExposureExchange rate risk as applied to the realized homecurrency value of the firm's contractual cash flowsThe subject of Chapter 8.EconomicExposureExchange rate risk as applied to the firm's value. Thesubject of Chapter 9Translation ExposureExchange rate risk as applied to the firm's consolidatedfinancialstatements.ThesubjectofChapter10

❖Transaction Exposure ▪ Exchange rate risk as applied to the realized home currency value of the firm’s contractual cash flows. The subject of Chapter 8. ❖Economic Exposure ▪ Exchange rate risk as applied to the firm’s value. The subject of Chapter 9 ❖Translation Exposure ▪ Exchange rate risk as applied to the firm’s consolidated financial statements. The subject of Chapter 10 Three Types of Exposure

WhatisTransaction Exposure:anExampleYou are a U.S. importer of Britishwoolens and have just ordered nextyear's inventory. Payment of 100M isdue in one year.Question: what kind of exposure is it inthis case? How can you fix the cashoutflowindollars?

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: what kind of exposure is it in this case? How can you fix the cash outflow in dollars? What is Transaction Exposure : an Example

Different ways of hedgingFinancialcontractsForwardMarketHedgeMoney Market HedgeOptions Market HedgeSwapContractsOperational techniques Hedging Through Invoice Currency Hedging via Lead and LagExposure Netting

Different ways of hedging ❖Financial contracts ▪ Forward Market Hedge ▪ Money Market Hedge ▪ Options Market Hedge ▪ Swap Contracts ❖Operational techniques ▪ Hedging Through Invoice Currency ▪ Hedging via Lead and Lag ▪ Exposure Netting

Financial contracts(1):Forward Market HedgeYou are a U.S. importer of British woolens and havejust ordered next year's inventory. Payment of100Misdueinoneyear.Answer: you can hedge your f100 millionpayable by buying f100M in one year-along forward contract on the pound

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. Financial contracts(1) : Forward Market Hedge Answer: you can hedge your £100 million payable by buying £100M in one year—a long forward contract on the pound

ForwardMarketHedgeIf you are going to owe foreign currency inthe future, agree to buy the foreigncurrency now by entering into long positionin a forward contract.If you are going to receiveforeigncurrency in the future, agree to sell theforeign currency now by entering into shortposition in a forward contract

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

Financial contracts (2):MoneyMarket HedgeThe importer of British woolens canalso hedge his 100million payable with a money market hedge This is the same idea as covered interest arbitrage(borrow-spot-invest, BSl Method)Information:S($/E)$1.25/Spot exchange rateF360($/E)$1.20/360-dayforwardrateis7.10%U.S. discount rate=it11.56%British discountrate

Financial contracts (2): Money Market Hedge The importer of British woolens can also hedge his £100 million payable with a money market hedge ❖ This is the same idea as covered interest arbitrage (borrow-spot-invest, BSI Method) ❖ Information: 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%

MoneyMarket Hedge1. Borrow $112.05 million in the U.S2. Translate $112.05 million into pounds at the spotrate S($/) = $1.25/f3. Invest f89.64 million in the UK at i = 11.56% forone year.In one year your investment will have grown to 100million.At the same time, you need to repay the bank:$112.05M (1*7.10%)=120.05M

Money Market Hedge 1. Borrow $112.05 million in the U.S. 2. Translate $112.05 million into pounds at the spot rate S($/£) = $1.25/£ 3. 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. At the same time, you need to repay the bank: $112.05M (1*7.10%)=120.05M

MoneyMarket HedgeWhere do the numbers come from?We owe our supplier f100 million in one year-so we knowthat we need to have an investment with a future value off100 million. Since i. = 11.56% we need to invest f89.64million at the start of the year.10089.64 =1.1156How many dollars will it take to acguire f89.64 million at thestart of the year if the spot rate S($/) = $1.25/f?$112.05 = 89.64x1.25

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 100 89.64 = $112.05 =89.641.25