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Lecture International finance: An analytical approach (3/e): Chapter 13 - Imad A. Moosa

Chapter 13 - Foreign exchange risk management. The objectives of this chapter are: To explain why there is concern about foreign exchange risk; to illustrate how to manage short-term transaction exposure using forward hedging, futures hedging, money market hedging and option hedging; to illustrate other techniques of managing short-term and longterm transaction exposure; | Lecture International finance An analytical approach 3 e Chapter 13 - Imad A. Moosa Chapter 13 Foreign Exchange Risk Management Objectives To explain why there is concern about FX risk To illustrate how to manage transaction economic and translation exposure Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs t a International Finance An Analytical Approach 3e by Imad A. Moosa Slides prepared by Afaf Moosa 13-2 Hedging Hedging which is the core risk management operation is a process whereby a firm can protect itself from unanticipated changes in exchange rates and other sources of risk cont. Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs t a International Finance An Analytical Approach 3e by Imad A. Moosa Slides prepared by Afaf Moosa 13-3 Hedging cont. The decision to hedge or not to hedge an uncovered or open foreign currency position is basically a speculative decision It all depends on the expected exchange rate or the movement of the exchange rate between the point in time when the decision is taken and when its effect materialises Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs t a International Finance An Analytical Approach 3e by Imad A. Moosa Slides prepared by Afaf Moosa 13-4 Why is there no need to worry about FX risk If international parity conditions hold FX risk will not arise If it is possible to forecast exchange rates accurately FX risk can be controlled Shareholders are naturally hedged though diversification Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs t a International Finance An Analytical Approach 3e by Imad A. Moosa Slides prepared by Afaf Moosa 13-5 Why worry about FX risk International parity conditions do not hold Forecasting exchange rates is rather difficult Hedging produces a more stable income stream Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs t a International Finance An Analytical Approach 3e by Imad A. Moosa Slides prepared by Afaf Moosa 13-6 Benefits of hedging Hedging has a positive effect on the value of the firm