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Ebook International financial management (9/E): Part 2

Part 1 book “International financial management” has contents: Managing transaction exposure, managing economic exposure and translation exposure, direct foreign investment, multinational capital budgeting, international acquisitions, country risk analysis, multinational cost of capital and capital structur, and other contents. | 11: Managing Transaction Exposure Recall from the previous chapter that a multinational corporation (MNC) is exposed to exchange rate fluctuations in three ways: (1) transaction exposure, (2) economic exposure, and (3) translation exposure. This chapter focuses on the management of transaction exposure, while the following chapter focuses on the management of economic and translation exposure. By managing transaction exposure, financial managers may be able to increase cash flows and enhance the value of their MNCs. The specific objectives of this chapter are to: ■ compare the techniques commonly used to hedge payables, ■ compare the techniques commonly used to hedge receivables, ■ explain how to hedge long-term transaction exposure, and ■ suggest other methods of reducing exchange rate risk when hedging techniques are not available. Transaction Exposure Transaction exposure exists when the anticipated future cash transactions of a fi rm are affected by exchange rate fluctuations. A U.S. fi rm that purchases Mexican goods may need pesos to buy the goods. Though it may know exactly how many pesos it will need, it doesn’t know how many dollars will be needed to be exchanged for those pesos. This uncertainty occurs because the exchange rate between pesos and dollars fluctuates over time. A U.S.-based MNC that will be receiving a foreign currency is exposed because it does not know how many dollars it will obtain when it exchanges the foreign currency for dollars. If transaction exposure exists, the fi rm faces three major tasks. First, it must identify its degree of transaction exposure. Second, it must decide whether to hedge this exposure. Finally, if it decides to hedge part or all of the exposure, it must choose among the various hedging techniques available. Each of these tasks is discussed in turn. Identifying Net Transaction Exposure Before an MNC makes any decisions related to hedging, it should identify the individual net transaction exposure on a .