tailieunhanh - Lecture International finance: An analytical approach (2/e) – Chapter 14: Foreign exchange risk management

Lecture International finance: An analytical approach (2/e) – Chapter 14: Foreign exchange risk management. The goals of this chapter are: To explain why there is concern about FX risk, to illustrate how to manage transaction, economic and translation exposure. | Chapter 14 Foreign Exchange Risk Management Objectives To explain why there is concern about FX risk. To illustrate how to manage transaction, economic and translation exposure. 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. Why Worry About FX Risk? Parity conditions do not hold. Forecasting exchange rates is rather difficult. Hedging produces a more stable income stream. Why is a Stable Income Stream Desirable? If a progressive tax rate is in operation, more stable before-tax income produces higher after-tax income. It is more conducive to sales. Volatile earnings may imply lack of job security. Managing Short-Term Transaction Exposure Forward hedging Money market hedging Futures hedging Option hedging Forward Hedging Forward hedging entails locking in the exchange rate at which payables and receivables are converted from the domestic currency into a foreign currency, and vice versa. Forward Hedging (no-hedge) (hedge) V Financial Hedging By taking an affecting position on a hedging instrument (forward), the profit/loss on the unhedged position is offset by the loss/profit on the hedging instrument. Offsetting Profit/Loss on Payables + Long forward Payables – (a) (par) Offsetting Profit/Loss on Payables (cont.) + Long forward Payables – (b) (premium) Offsetting Profit/Loss on Payables (cont.) + Long forward Payables – (c) (discount) Introducing the Bid-Offer Spread H N-H Payables Receivables Futures Hedging Futures hedging results may differ quantitatively from those of forward hedging. Because of the standardisation of contracts, it may not be possible to hedge the exact amount. Futures Hedging (cont.) The due date may not coincide with the settlement date. Marking-to-market introduces some variation. Money Market Hedging A money market hedge amounts to taking a | Chapter 14 Foreign Exchange Risk Management Objectives To explain why there is concern about FX risk. To illustrate how to manage transaction, economic and translation exposure. 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. Why Worry About FX Risk? Parity conditions do not hold. Forecasting exchange rates is rather difficult. Hedging produces a more stable income stream. Why is a Stable Income Stream Desirable? If a progressive tax rate is in operation, more stable before-tax income produces higher after-tax income. It is more conducive to sales. Volatile earnings may imply lack of job security. Managing Short-Term Transaction Exposure Forward hedging Money market hedging Futures hedging Option hedging Forward Hedging Forward hedging entails locking in the exchange rate at which .