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    Presentation On Chapter 11: "Managing Transaction Exposure": Presented by

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    Transaction exposure exists when future cash flows are affected by exchange rate fluctuations. Common hedging techniques include futures, forwards, money markets, and options. While US companies selling abroad have traditionally preferred dollar payments, some are realizing benefits of accepting foreign currencies and hedging the risk. The 1994 peso collapse showed risks of relying only on dollar payments. Hedging may theoretically protect receivables but practical hedging of some currencies is difficult and expensive. Studies have found both benefits and costs to hedging foreign currency exposure, with the optimal level depending on factors like portfolio size and country.

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    Presentation On Chapter 11: "Managing Transaction Exposure": Presented by

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    49 views10 pages
    Transaction exposure exists when future cash flows are affected by exchange rate fluctuations. Common hedging techniques include futures, forwards, money markets, and options. While US companies selling abroad have traditionally preferred dollar payments, some are realizing benefits of accepting foreign currencies and hedging the risk. The 1994 peso collapse showed risks of relying only on dollar payments. Hedging may theoretically protect receivables but practical hedging of some currencies is difficult and expensive. Studies have found both benefits and costs to hedging foreign currency exposure, with the optimal level depending on factors like portfolio size and country.

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    Managing Transaction Exposure

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    FIN444 Presentation

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    Transaction exposure exists when future cash flows are affected by exchange rate fluctuations. Common hedging techniques include futures, forwards, money markets, and options. While US companies selling abroad have traditionally preferred dollar payments, some are realizing benefits of accepting foreign currencies and hedging the risk. The 1994 peso collapse showed risks of relying only on dollar payments. Hedging may theoretically protect receivables but practical hedging of some currencies is difficult and expensive. Studies have found both benefits and costs to hedging foreign currency exposure, with the optimal level depending on factors like portfolio size and country.

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    49 views10 pages

    Presentation On Chapter 11: "Managing Transaction Exposure": Presented by

    Uploaded by

    Supto
    Transaction exposure exists when future cash flows are affected by exchange rate fluctuations. Common hedging techniques include futures, forwards, money markets, and options. While US companies selling abroad have traditionally preferred dollar payments, some are realizing benefits of accepting foreign currencies and hedging the risk. The 1994 peso collapse showed risks of relying only on dollar payments. Hedging may theoretically protect receivables but practical hedging of some currencies is difficult and expensive. Studies have found both benefits and costs to hedging foreign currency exposure, with the optimal level depending on factors like portfolio size and country.

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    Presentation on Chapter 11:

    MANAGING TRANSACTION EXPOSURE

    PRESENTED BY:

    JAYEED AL SABIT 133 0529 030

    SHAMAMA SHAHTAJ HUQ 143 0944 030


    Transaction exposure exists when the future
    cash transactions of a firm are affected by
    exchange rate fluctuations.
    Hedging techniques include:
    Futures hedge
    Forward hedge
    Money market hedge
    Currency option hedge
    Article: Managing Foreign Currency Receivables
    Published in Business Finance newspaper

    Source: http://businessfinancemag.com/tax-amp-
    accounting/managing-foreign-currency-receivables
    Growth of small and mid-sized US companies selling outside
    US increased dramatically in the last few decades.
    Follow the rule: Don't sell in foreign currencies if you can
    possibly avoid it
    Unwanted nuisance and expense, time consuming, unfamiliar
    to few.
    Preferred to be paid in dollars when selling abroad
    View changing
    Realizing benefits: Boost sales
    Hedging Tactics of small and mid-
    sized US companies:

    FORWARD OPTION
    HEDGING HEDGING
    Lesson of the Peso Collapse
    The dramatic free fall of the Mexican peso in
    December 1994 effectively exploded the
    notion that currency risk can be avoided only
    by selling only in dollars.
    Most U.S. exporters sold only in dollars and
    thus had no technical peso exposure on their
    books.
    Rendered their receivables uncollectible.
    Expert Analysis of The Issue
    Would the exporters have been better off to have
    sold in pesos and hedged their exposure?
    Theoretically, yes, but practically, no, because the
    peso is not freely convertible and therefore
    difficult and expensive to hedge costing about
    30 percent of the transaction.
    Article - Why Currency Hedging Doesnt Work in
    Canada
    Source - http://www.moneysense.ca/columns/why-currency-hedging-doesnt-work-in-canada/

    The Pyramis researchers explain exposure to these currencies is a


    that the US dollar, euro and Swiss benefit, and hedging wipes it out.
    franc tend to have negative
    correlation with the global equity
    markets.
    The CPP Investment Board sees hedging is a costly strategy that
    no compelling reason to actually increases risk and
    hedge equity-related currency frequently fails to offer a benefit
    exposure, largely because even when the Canadian dollar
    hedging would unduly tie appreciates.
    Fund returns to the price of oil
    and other commodities as they
    drive the foreign exchange
    value of the Canadian dollar.
    Does Hedging Lower Volatility?

    David Swensonthe legendary He says one should hedge foreign


    manager of the Yale Endowment currency once it exceeds 25% of the
    explains that currency portfolios assets: Beyond a quarter
    diversification is a benefit, but of portfolio assets, the currency
    only to a point. exposure constitutes a source of
    unwanted risk.
    Other studies also suggest too A research paper prepared for the IMF
    much foreign currency looked at data for France, Germany,
    exposure creates more Japan, the United Kingdom and the US,
    volatility with no increase in concluding that currency hedging
    expected returns. appears to effectively reduce the
    variance of foreign investment returns
    not only at short investment horizons but
    also at horizons of up to 5 years in most
    cases.
    Does Hedging Lower Volatility?

    A research of Pyramis Global In another analysis,


    Advisors which looked at data researchers at J.P. Morgan
    from 1990 through 2009 and Asset Management found
    found that a hedging at least part of an
    fully unhedged portfolio had the equity portfolios foreign
    lowest volatility: hedging half the currency risk lowered
    foreign currency increased the volatility in the first five
    annual standard deviation of countries, but in Canada
    returns, and hedging all the and Australia the strategy
    currency bumped it even higher. was counterproductive.

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