INTERNATIONAL
FINANCIAL MANAGEMENT
EUN / RESNICK /SABHERWAL
Sixth Edition
Copyright ? 2014by The McGraw-Hill Companies, Inc. All rights reserved.
McGraw-Hill/Irwin
Chapter Objective:
This chapter discusses various methods available for the management of transaction exposure facing multinational firms.
This chapter ties together chapters 5, 6, and 7.
8
Chapter Eight
Management of
Transaction Exposure
8-1
Transaction Exposure
●Transaction exposure can be defined as the sensitivity of realized home currency values of the firm’s contractual cash flows denominated in foreign currencies to unexpected exchange rate changes.
●Since settlement of these contractual cash flows affect the firm’s home currency cash flow, transaction exposure is regarded as a short-term economic exposure.
●Transaction exposure arises from fixed-price contracting in a world where exchange rates are changing randomly.
Example
Consider a Japanese firm entering into a loan contract with a Swiss bank that calls for the payment of SF100M for principle and interest in one year. Since Yen/Swiss is uncertain, the Japanese firm does not know how much Yen it will take to buy SF100M spot in one year’s time. If the Yen appreciates (depreciates) against the Swiss Franc, a smaller (larger) Yen amount will needed to pay off the SF-denominated loan.
Exposure
●The set points of this chapter is to introduce various methods available for the management of transaction exposure facing multinational firms.
●Financial Contracts
●Forward market hedge
●Money market hedge
●Option market hedge
●Swap market hedge
Exposure
●The set points of this chapter is to introduce various methods available for the management of transaction exposure facing multinational firms.
●Operational Techniques
●Choice of invoice currency
●Lead/lag strategy
●Exposure netting (风险暴露的净额结算)
Chapter Outline
●8.1 Forward Market Hedge
●8.2 Money Market Hedge
●8.3 Options Market Hedge
●8.4 Cross-Hedging Minor Currency Exposure(次要
货币风险暴露的交叉避险)
●8.5 Hedging Contingent Exposure(或有风险避险)●8.6 Hedging Recurrent Exposure with Swap Contracts
(通过互换合同对周期性风险暴露的避险)
8-6
7
Chapter Outline (continued)
●8.7 Hedging Through Invoice Currency ●8.8 Hedging via Lead and Lag ●8.9 Exposure Netting
●8.10 Should the Firm Hedge?
●
8.11 What Risk Management Products do Firms Use?
8-7
8.1 Forward Market Hedge:Exports If you are going to receive foreign currency in the future, agree to sell the foreign currency in the future at a set price by entering into short position in a forward contract.
Forward Contract Counterparty Exporter
Foreign
Customer
Forward Market Hedge: Imports If you expect to owe foreign currency in the future, you can hedge by agreeing today to buy the foreign currency in the future at a set price by entering into a long position in a
forward contract.
Forward Contract Counterparty Importer
Foreign
Supplier
Forward Market Hedge: Importer’s Example
Forward Contract Counterparty
U.S.
Importer
Italian
Supplier
A U.S.-based importer of Italian shoes has just ordered next year’s inventory. Payment of €100M is due in one year. If the importer buys €100M at the forward exchange rate of $1.50/€, the cash flows at maturity look like this:
11
Forward Market Hedge
$1.50/€Value of €1 in $
in one year
Suppose the
forward exchange rate is $1.50/€.
If he does not
hedge the €100m
payable, in one year his gain
(loss) on the unhedged position is shown in green.
$0
$1.20/€$1.80/€–$30m $30m
Unhedged payable
The importer will be better off if
the euro depreciates: he still buys €100m but at an exchange rate of only $1.20/€he saves $30 million relative to $1.50/€But he will be worse off if the pound appreciates.8-11
12
Forward Market Hedge
$1.50/€Value of €1 in $
in one year $1.80/€If he agrees to buy €100m in one year at
$1.50/€his gain (loss) on the forward are shown in blue.
$0$30m
$1.20/€–$30m
Long forward
If you agree to buy €100 million at a price of $1.50 per pound, you will lose $30 million if the price of the euro falls
to $1.20/€.
If you agree to buy €100 million at a price of $1.50/€, you will make $30 million if the price of the euro reaches $1.80.
8-12
Forward Market Hedge
$1.50/€
Value of €1 in $
in one year $1.80/€
The red line shows the payoff of the hedged payable. Note
that gains on one position are offset by losses on the other position.$0
$30 m
$1.20/€–$30 m
Long
forward
Unhedged
payable Hedged payable
8-13
Futures Market Cross-Currency Hedge: Step One
●You have to convert the €750,000 receivable first into dollars and then into pounds.
●If we sell the €750,000 receivable forward at the six-month forward rate of $1.50/€we can do this with a SHORT position in 6 six-month euro
futures contracts.
6 contracts =
€750,000
€125,000/contract
8-15
Futures Market Cross-Currency Hedge: Step Two
●Selling the €750,000 forward at the six-month forward rate of $1.50/€generates $1,125,000:
9 contracts =
￡562,500￡62,500/contract
$1,125,000 = €750,000 ×€1
$1.50
●At the six-month forward exchange rate of $2/￡,
$1,125,000 will buy ￡562,500.
●We can secure this trade with a LONG position in
9 six-month pound futures contracts:
8-16
Exporter’s Futures Market Cross-Currency Hedge: Cash Flows at Maturity
Exporter
Customer
€750,000
€750,000 $1,125,000Short position in 6 six-month euro futures on €125,000at $1.50/€1Long position in 9 six-month pound futures on ￡62,500 at $2.00/￡1
Bicycles $1,125,000￡562,500
8.2 Money Market Hedge
●To hedge a foreign currency payable, buy a
bunch of that foreign currency today and
sit on it.
●Buy the present value of the foreign currency
payable today.
●Invest that amount at the foreign rate.
●At maturity your investment will have grown
enough to cover your foreign currency payable. 8-18
Money Market Hedge
A U.S.–based importer of Italian bicycles
●In one year owes €100,000 to an Italian supplier.●The spot exchange rate is $1.50 = €1.00●
The one-year interest rate in Italy is i €= 4%
$1.50€1.00
Dollar cost today = $144,230.77 = €96,153.85 ×
€100,000
1.04€96,153.85 = Can hedge this payable by buying today and investing €96,153.85 at 4% in Italy for one year.At maturity, he will have €100,000 = €96,153.85 ×(1.04)8-19