1. exchange rate risk management.pptx
TRANSCRIPT
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Exchange rate exposurebyNguyen Diep Ha
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References
Chapter 10, 11, 12 Jef
Chapter 10, 11, 12 Eiteman
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Is Exchange Rate RiskRelevant?
Purchasing Power Parity Argument Exchange rate movements will e matche! y
price movements"
### !oes not necessarily hol!"
The Investor Hedge Argument $NC sharehol!ers can he!ge against exchange
rate %uctuations on their own"
&he investors may not have completein'ormation on corporate exposure" &hey maynot have the capailities to correctly insulatetheir in!ivi!ual exposure too"
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Is Exchange Rate RiskRelevant?
Currency Diversifcation Argument (n $NC that is well !iversi)e! shoul! not e
afecte! y exchange rate movements ecause
o' ofsetting efects"&his is a naive presumption"
Stakeholder Diversifcation Argument *ell !iversi)e! sta+ehol!ers will e somewhat
insulate! against losses experience! y an$NC !ue to exchange rate ris+"
$NCs may e afecte! in the same wayecause o' exchange rate ris+"
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Is Exchange Rate RiskRelevant?
Resonse !rom "#Cs
$any $NCs have attempte! tostailie their earnings with he!gingstrategies, which con)rms the viewthat exchange rate ris+ is relevant"
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Types of exchange rateexposures
(lthough exchange rates cannot e'orecaste! with per'ect accuracy, )rmscan at least measure their exposure to
exchange rate %uctuations" Exposure to exchange rate %uctuations
comes in three 'orms-
&ransaction exposure Economic exposure
&ranslation exposure
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Types of exchange rateexposures
&he !egree to which the value o' 'uturecash transactions can e afecte! yexchange rate %uctuations is re'erre! to as
transaction e$osure" %conomic e$osurere'ers to the !egree to
which a )rm.s present value o' 'uture cash%ows can e in%uence! y exchange rate
%uctuations"
&he exposure o' the $NC.s consoli!ate!)nancial statements to exchange rate
%uctuations is +nown as translatione$ osure"11/22/14 7By NDH
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TRANSACTION EXOS!RE
$easure
$anage
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"easuring transactionexposure
1" #ro/ect the net amount o' in%ows orout%ows which are normally shortterm an! contractual in each 'oreign
currency, an!
2" Determine the overall ris+ o'exposure to those currencies"
ange tan!ar! !eviation
3alue at is+ 43a5
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Range
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Stan#ar# #eviation
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Stan#ar# #eviation
6uarterly stan!ar! !eviation4rates'x"com5
Currency 20011778
2009200:;ritish poun! 0"807 0"19:Cana!ian !ollar 0"100 0"10
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Stan#ar# #eviation
Correlation coe@cients
A CanB $# +w
;ritishpoun! 4A5 1"00Cana!ian!ollar 4CanB5 "1:1"00
Japaneseyen 45 "9?"0=1"00$exican peso
4$#5 "87"20 "881"00we!ish+rona 4+5 "=2"1= "9="881"00wiss 'ranc4w5 "=8"12 "=1"8> ">01"00
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$aR
&he 3alue at is+ measures thepotential maximum loss in value o' anasset or port'olio over a !e)ne! perio!
'or a given con)!ence interval"
Diferent types o' 3a- #arametric
Historical
$onteCarloF""
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ara%etric $aR
3a 'or 1 !ay horion- 3a G 4E4e5 Ii5I3
Ex1- Celia Co" will receive 10 million $exican pesos
4$#5 tomorrow as a result o' provi!ing consultingservices to a $exican )rm"
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ara%etric $aR
3a over t!ay horion-
3a G E4e5 I Ii
Ex- imilarly, Celia will collect themoney in 10 !ays
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Transaction exposure%anage%ent
He!ging
Lther alternatives Mea!ing an! Magging
Currency !iversi)cation
einvoicing
#arallel loans
Currency swap
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&e#ging techni'ues
1" orwar! 4'uture5 he!ge,
2" $oney mar+et he!ge,
8" Currency option he!ge"
(ssuming to!ay, ;oeing sells a ;oeing >9> to;ritish (irlines 'or A10m payale in 1 year inDec 2019"
. mar+et rate- =,1O
.P mar+et rate- 7O.pot rate- 1"?00B G 1A.1year 'orwar! rate- 1"9=0B G 1A.Dec 'uture contract is price! at 1"9?9B G 1A
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(or)ar#
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Hedge usingforwrd
No !edge
"#
$%ue
&'1(460
)orwrd *o se%%+B,
14.600.000-
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(uture vs* (or)ar#
#ros- uture contracts are more cost e@cient
'or small transactions
Cons- orwar! contracts can e negotiale an!
tailore! to the company.s reQuirements
per'ect he!ge $ar+e!tomar+et in 'uture mar+et
some cash %ow ris+ with margin call
#ro!ucts in 'uture mar+ets are Quitelimite!"11/22/14 By NDH 22
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"oney %arket he#ge
pot C C atmaturity
1" ;orrow R;# A 7,1>9,812 A10,000,000
2" Convert intoD
B18,>=1,9=: A 7,1>9,812
8" =1,9=: B19,=00,71:
9" (t maturity A10,000,000
Net C 0 19,=00,71:
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Option
( put or a callS
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14.387.800-
Hedge usingo*ion
No !edge$%ue
"#&'1(46
,u* o*ion on
+B,
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+ecision
Calculate an! compare expecte! C
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Scenario
E ro, (or)ar#
"oney%arket
Option Noheg#e
1 0"=7 80O
2 0">1 90O
8 0">9 80O
Expecte! cash%ow
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+ecision
&he !ecision !epen!s on )rm.s ris+ tolerance,their mar+et expectation, their con)!ence in their
'orecast an! their target"By NDH 26
*ion
No !edge
)orwrd
oney re*
14.387.800-
14.600.000-
14.600.918-
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Other alternatives
-ea#ing an# lagging (!/ust the timing o' payment in accor!ance with
expectation o' exchange rate movements
Mea!ing- push up the payment e'ore the 'oreign
currency appreciate Magging- !elay payment until the 'oreign currency
!epreciate
;arely 'easile 'or receivales
Cross.he#ge/ when there is no active mar+et 'or the currency i"e"
'orwar! or option is not availale, the )rm can use otherassets which is highly correlate! to the currency e"g" oilprice an! the peso, Porean won an! Japanese yen,F"
&he efectiveness !epen!s on the correlation11/22/14 By NDH 27
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Other alternatives
Currency #iversi0cation
$ore applicale 'or large $NCs whosepresence is among numerous countries"
Risk sharing/
;uyer an! seller agrees to share or splitcurrency movement impact on paymentsetween them"
$ore suitale 'or longterm relationship
Lnly helps smooth out the %uctuation
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Other alternatives
arallel loans- no nee! to use the 'oreignexchange mar+et
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;ritish parent
company
Dutchcompany.s;ritish
susi!iary
;ritishcompany.s
Dutch susi!iary
Dutch parent
company
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Other alternatives
Reinvoicing center/ costene)t analysis ;ene)t- efectively eliminate the exchange rate ris+
Cost- setup cost, operation expenses, pro'essionalcost especially those relate! to tax an! legal services
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('ter netting,only nee! tohe!ge the
resi!ual exposure
einvoicing Center
&ri!ent (4manu'acture
un)nishe! goo!s5
&ri!ent ;rail4)nish the local
sales5
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Other alternatives
Currency s)aps/li+e parallel loans ut it!oes not appear on the alance sheet translation exposure is avoi!e! as well"
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Japanesecorporation
"" corporation
wap!ealer
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ro,le%s
88 chap 10 Jef
88, 9?, 9=,9> chap 11 Jef
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