C09-Transaction-Exposure.ppt
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1、Copyright 2009 Pearson Prentice Hall.All rights reserved.Chapter 9Transaction ExposureForeign Exchange ExposureTransaction Exposure and Hedging TechniquesAn example:Tridents Transaction ExposureForeign Exchange ExposureTransaction Exposure and Hedging TechniquesAn example:Tridents Transaction Exposu
2、reLearning ObjectivesDistinguish between the three major foreign exchange exposures experienced by firmsAnalyze the pros and cons of hedging foreign exchange transaction exposureIdentify foreign exchange transaction exposureIdentify the alternatives available to a firm for managing a large and signi
3、ficant transaction exposure2Foreign Exchange ExposureTransaction Exposure and Hedging TechniquesAn example:Tridents Transaction ExposureForeign Exchange ExposureTransaction Exposure and Hedging TechniquesAn example:Tridents Transaction ExposureForeign Exchange ExposureForeign exchange exposure is a
4、measure of the potential for a firms profitability,net cash flow,and market value to change because of a change in exchange ratesThe profits,cash flow and market value are the key financial elements of how we view the relative success or failure of a firmTypes of foreign exchange exposureTransaction
5、 Exposure measures changes in the value of outstanding financial obligations incurred prior to a change in exchange rates but not due to be settled until after the exchange rate changesOperating Exposure also called economic exposure,measures the change in the present value of the firm resulting fro
6、m any change in expected future operating cash flows cTranslation Exposure also called accounting exposure,is the potential for accounting derived changes in owners equity to occur because of the need to“translate”financial statements of foreign subsidiaries into a single reporting currency for cons
7、olidated financial statements caused by an unexpected change in exchange rates3Foreign Exchange ExposureTransaction Exposure and Hedging TechniquesAn example:Tridents Transaction ExposureForeign Exchange ExposureTransaction Exposure and Hedging TechniquesAn example:Tridents Transaction ExposureExhib
8、it 9.1 Conceptual Comparison of Transaction,Operating,and Translation Foreign Exchange Exposure4Foreign Exchange ExposureTransaction Exposure and Hedging TechniquesAn example:Tridents Transaction ExposureForeign Exchange ExposureTransaction Exposure and Hedging TechniquesAn example:Tridents Transact
9、ion ExposureMeasurement of Transaction ExposureTransaction exposure measures gains or losses that arise from the settlement of existing financial obligations.5Foreign Exchange ExposureTransaction Exposure and Hedging TechniquesAn example:Tridents Transaction ExposureForeign Exchange ExposureTransact
10、ion Exposure and Hedging TechniquesAn example:Tridents Transaction Exposure1)_ exposure deals with cash flows that result from existing contractual obligations.A)Operating B)Transaction C)Translation D)Economic Answer:B 6Foreign Exchange ExposureTransaction Exposure and Hedging TechniquesAn example:
11、Tridents Transaction ExposureForeign Exchange ExposureTransaction Exposure and Hedging TechniquesAn example:Tridents Transaction ExposureMeasurement of Transaction ExposureTransaction exposure:Purchasing or selling on credit goods or services when prices are stated in foreign currenciesBorrowing or
12、lending funds when repayment is to be made in a foreign currencyBeing a party to an unperformed forward contract and Otherwise acquiring assets or incurring liabilities denominated in foreign currencies7Foreign Exchange ExposureTransaction Exposure and Hedging TechniquesAn example:Tridents Transacti
13、on ExposureForeign Exchange ExposureTransaction Exposure and Hedging TechniquesAn example:Tridents Transaction ExposureTransaction Exposure:Purchasing or Selling on Open AccountSuppose Trident Corporation sells merchandise on open account to a Belgian buyer for 1,800,000 payable in 60 daysFurther as
14、sume that the spot rate is$1.2000/and Trident expects to exchange the euros for 1,800,000 x$1.2000/=$2,160,000 when payment is receivedTransaction exposure arises because of the risk that Trident will something other than$2,160,000 expectedIf the euro weakens to$.1000/,then Trident will receive$1,98
15、0,000If the euro strengthens to$1.3000/,then Trident will receive$2,340,0008Foreign Exchange ExposureTransaction Exposure and Hedging TechniquesAn example:Tridents Transaction ExposureForeign Exchange ExposureTransaction Exposure and Hedging TechniquesAn example:Tridents Transaction ExposureExhibit
16、9.3 The Life Span of a Transaction Exposure9Foreign Exchange ExposureTransaction Exposure and Hedging TechniquesAn example:Tridents Transaction ExposureForeign Exchange ExposureTransaction Exposure and Hedging TechniquesAn example:Tridents Transaction ExposureHedging Transaction ExposureTransaction
17、exposure can be managed by contractual and natural hedge.A natural hedge is one that results from matching foreign currency cash flows that come about from the normal operations of a MNE.An example would be for a MNE that had euro operating inflows from sales to borrow an equivalent amount of euros
18、to finance working capital.A contractual hedge is a contract specifically entered into as a financial rather than operating hedge.Examples are forward and future foreign exchange agreements,money market hedges,and purchase of options.10Foreign Exchange ExposureTransaction Exposure and Hedging Techni
19、quesAn example:Tridents Transaction ExposureForeign Exchange ExposureTransaction Exposure and Hedging TechniquesAn example:Tridents Transaction ExposureContractual Hedging TechniqueslHedging of ReceivablesSell futures or forward Money market hedgeborrow foreign currency to be receivedconvert to dome
20、stic currencyinvest for future useBuy Put Option lHedging of PayablesBuy futures or forward Money market hedgeborrow home currencyconvert to foreign currencyinvest for future useBuy Call Option 11Foreign Exchange ExposureTransaction Exposure and Hedging TechniquesAn example:Tridents Transaction Expo
21、sureForeign Exchange ExposureTransaction Exposure and Hedging TechniquesAn example:Tridents Transaction Exposure6)Losses from _ exposure generally reduce taxable income in the year they are realized._ exposure losses may reduce taxes over a series of years.A)accounting;Operating B)operating;Transact
22、ion C)transaction;Operating D)transaction;Accounting Answer:C 12Foreign Exchange ExposureTransaction Exposure and Hedging TechniquesAn example:Tridents Transaction ExposureForeign Exchange ExposureTransaction Exposure and Hedging TechniquesAn example:Tridents Transaction ExposureTridents Transaction
23、 ExposureMaria Gonzalez,CFO of Trident,has just concluded a sale to Regency,a British firm,for 1,000,000The sale is made in March for settlement due in three months time,JuneAssumptionsSpot rate is$1.7640/3 month forward rate is$1.7540/(a 2.2676%discount)Interest rate:UK 3 month borrowing rate is 10
24、.0%p.a.UK 3 month investing rate is 8.0%p.a.Tridents cost of capital is 12.0%US 3 month borrowing rate is 8.0%p.a.US 3 month investing rate is 6.0%p.a.June put option in OTC market for 1,000,000;strike price$1.75;1.5%premiumTridents foreign exchange advisory service forecasts future spot rate in 3 m
25、onths to be$1.7600/Trident operates on thin margins and Maria wants to secure the most amount of US dollars;her budget rate(lowest acceptable amount)is$1.7000/13Foreign Exchange ExposureTransaction Exposure and Hedging TechniquesAn example:Tridents Transaction ExposureForeign Exchange ExposureTransa
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- C09 Transaction Exposure
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