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11
Chapter Objectives
To identify the commonly used
techniques for hedging transaction exposure;
Chapter Objectives
To suggest other methods of
reducing exchange rate risk when hedging techniques are not available.
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Transaction Exposure
Transaction exposure exists when the
future cash transactions of a firm are affected by exchange rate fluctuations.
Futures hedge, Forward hedge, Money market hedge, and Currency option hedge.
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Payables: Borrow in the home currency, and invest in the foreign currency. Receivables: borrow in the foreign currency, and invest in the home currency.
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Limitations of Hedging
Some international transactions involve
an uncertain amount of foreign currency, such that overhedging may result.
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Limitations of Hedging
In the long run, the continual hedging of
repeated transactions may have limited effectiveness.
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m E ER ? CFj , t
v E j , t
A n !1 j Value = t 1 k
t =1
E (CFj,t ) = expected cash flows in currency j to be received by the U.S. parent at the end of period t E (ERj,t ) = expected exchange rate at which currency j can be converted to dollars at the end of period t k = weighted average cost of capital of the parent
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