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    International Financial Management Abridged 10 Edition: by Jeff Madura

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    Hiếu Nhi Trịnh
    The document discusses techniques for hedging transaction exposure, including forwards, futures, money market hedges, and call and put options. It also addresses hedging payables and receivables, long-term hedging, limitations of hedging, and alternative hedging techniques.

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    © All Rights Reserved
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    International Financial Management Abridged 10 Edition: by Jeff Madura

    Uploaded by

    Hiếu Nhi Trịnh
    56 views16 pages
    The document discusses techniques for hedging transaction exposure, including forwards, futures, money market hedges, and call and put options. It also addresses hedging payables and receivables, long-term hedging, limitations of hedging, and alternative hedging techniques.

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    QTTCQT_PPT_ch11

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    The document discusses techniques for hedging transaction exposure, including forwards, futures, money market hedges, and call and put options. It also addresses hedging payables and receivables, long-term hedging, limitations of hedging, and alternative hedging techniques.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    56 views16 pages

    International Financial Management Abridged 10 Edition: by Jeff Madura

    Uploaded by

    Hiếu Nhi Trịnh
    The document discusses techniques for hedging transaction exposure, including forwards, futures, money market hedges, and call and put options. It also addresses hedging payables and receivables, long-term hedging, limitations of hedging, and alternative hedging techniques.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 16

    International Financial Management

    Abridged 10th Edition


    by Jeff Madura

    1 © 2011, 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use
    as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
    11
    Managing Transaction Exposure

    Chapter Objectives
    This chapter will:
    A. Compare the commonly used techniques to hedge payables

    B. Compare the commonly used techniques to hedge


    receivables

    C. Explain how to hedge long-term transaction exposure

    D. Suggest other methods of reducing exchange rate risk when


    hedging techniques are not available

    2 © 2011, 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use
    as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
    Transaction Exposure

    1. MNC must identify its degree of transaction exposure


    2. MNC must consider the various techniques to hedge
    the exposure so that it can decide which hedging
    technique is optimal and whether to hedge its
    transaction exposure.

    3 © 2011, 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use
    as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
    Hedging Exposure to Payables

    1. Forward or futures hedge allows the MNC to lock in


    the exchange rate at which it can purchase a specific
    currency.
    2. Money market hedge involves taking a money market
    position to cover a future payables position.
    3. Call option hedge on payables provides the right to
    buy a specified amount of a particular currency at a
    specified strike price.

    4 © 2011, 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use
    as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
    Cost of Call Options

    1. Based on contingency graph


    a. Advantage: provides an effective hedge
    b. Disadvantage: premium must be paid
    2. Based on currency forecast
    a. MNC can incorporate forecasts of the spot rate to more
    accurately estimate the cost of hedging with call options.

    5 © 2011, 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use
    as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
    Exhibit 11.1 Contingency Graph for Hedging
    Payables With Call Options

    6 © 2011, 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use
    as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
    Optimal Technique for Hedging Payables

    1. Select optimal hedging technique by:


    a. Consider whether futures or forwards are preferred.
    b. Consider desirability of money market hedge versus
    futures/forwards based on cost.
    c. Assess the feasibility of a currency call option based on
    estimated cash outflows.
    2. Choose optimal hedge versus no hedge for payables
    3. Evaluate the hedge decision by estimating the real
    cost of hedging payables versus the cost of payables if
    not hedged.

    7 © 2011, 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use
    as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
    Hedging Exposure to Receivables

    1. Forward or futures hedge allows the MNC to lock in


    the exchange rate at which it can sell a specific
    currency.
    2. Money market hedge involves borrowing the currency
    that will be received and using the receivables to pay
    off the loan.
    3. Put option hedge on receivables provides the right to
    sell a specified amount of a particular currency at a
    specified strike price by a specified expiration date.

    9 © 2011, 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use
    as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
    Cost of Put Options

    1. Based on Contingency Graph


    a. Advantage: provides an effective hedge
    b. Disadvantage: premium must be paid
    2. Based on Currency Forecasts
    a. MNC can use currency forecasts to more accurately estimate
    the dollar cash inflows to be received when hedging with put
    options.

    10 © 2011, 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use
    as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
    Exhibit 11.5 Contingency Graph for Hedging Receivables
    with Put Options

    11 © 2011, 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use
    as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
    Optimal Technique for Hedging Receivables

    1. Select optimal hedging technique by:


    a. Consider whether futures or forwards are preferred.
    b. Consider desirability of money market hedge versus
    futures/forwards based on cost.
    c. Assess the feasibility of a currency put option based on
    estimated cash outflows.
    2. Choose optimal hedge versus no hedge for
    receivables
    3. Evaluate the hedge decision by estimating the real
    cost of hedging receivables versus the cost of
    receivables if not hedged.

    12 © 2011, 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use
    as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
    Hedging Policies of MNCs

    1. Hedging most of the exposure


    2. Hedging none of the exposure
    3. Selective hedging

    13 © 2011, 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use
    as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
    Limitations of Hedging

    1. Limitation of hedging an uncertain amount

    2. Limitation of repeated short-term hedging

    14 © 2011, 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use
    as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
    Exhibit 11.10
    Illustration of Repeated
    Hedging of Foreign
    Payables When the
    Foreign Currency is
    Appreciating

    Exhibit 11.11
    Long Term Hedging of
    Payables When the
    Foreign Currency is
    Appreciating

    15 © 2011, 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use
    as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
    Hedging Long-Term Transaction Exposure

    1. Long-Term Forward Contract: up to 5 years


    2. Parallel Loan:
    a. Exchange of currencies between two parties with a promise
    to re-exchange currencies at a specified exchange rate on a
    future date. (SWAP)

    16 © 2011, 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use
    as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
    Alternative Hedging Techniques

    1. Leading and Lagging: adjusting the timing of a


    payment or disbursement to reflect expectations about
    future currency movements.
    2. Cross-Hedging: hedging by using a currency that
    serves as a proxy for the currency in which the MNC
    is exposed.
    3. Currency Diversification: reduce exposure by
    diversifying business among numerous countries.

    17 © 2011, 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use
    as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

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