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1、INTERNATIONAL FINANCIAL MANAGEMENTEUN / RESNICKFifth EditionCopyright 2009 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/IrwinChapter Objective:This chapter discusses various methods available for the management of transaction exposure facing multinational firms. This chapter t
2、ies together chapters 5, 6, and 7.8 Chapter EightManagement of Transaction Exposure8-2Chapter OutlinelForward Market HedgelMoney Market HedgelOptions Market HedgelCross-Hedging Minor Currency ExposurelHedging Contingent ExposurelHedging Recurrent Exposure with Swap Contracts8-34Chapter Outline (cont
3、inued)lHedging Through Invoice CurrencylHedging via Lead and LaglExposure NettinglShould the Firm Hedge?lWhat Risk Management Products do Firms Use?8-4Forward Market HedgelIf you are going to owe foreign currency in the future, agree to buy the foreign currency now by entering into long position in
4、a forward contract.lIf you are going to receive foreign currency in the future, agree to sell the foreign currency now by entering into short position in a forward contract.8-5Forward Market Hedge: an ExampleYou are a U.S. importer of Italian shoes and have just ordered next years inventory. Payment
5、 of 100M is due in one year.Question: How can you fix the cash outflow in dollars?Answer: One way is to put yourself in a position that delivers 100M in one yeara long forward contract on the euro. 8-67Forward Market Hedge$1.50/Value of 1 in $ in one yearSuppose the forward exchange rate is $1.50/.
6、If he does not hedge the 100m payable, in one year his gain (loss) on the unhedged position is shown in green. $0$1.20/$1.80/$30m$30mUnhedged payableThe importer will be better off if the euro depreciates: he still buys 100m but at an exchange rate of only $1.20/ he saves $30 million relative to $1.
7、50/ But he will be worse off if the pound appreciates.8-78Forward Market Hedge$1.50/Value of 1 in $ in one year$1.80/If he agrees to buy 100m in one year at $1.50/ his gain (loss) on the forward are shown in blue. $0$30m$1.20/$30mLong forwardIf you agree to buy 100 million at a price of $1.50 per po
8、und, you will lose $30 million if the price of the euro falls to $1.20/.If you agree to buy 100 million at a price of $1.50/, you will make $30 million if the price of the euro reaches $1.80.8-8Forward Market Hedge$1.50/Value of 1 in $ in one year$1.80/The red line shows the payoff of the hedged pay
9、able. Note that gains on one position are offset by losses on the other position.$0$30 m$1.20/$30 mLong forwardUnhedged payableHedged payable8-9Futures Market Cross-Currency HedgeYour firm is a U.K.- based exporter of bicycles. You have sold 750,000 worth of bicycles to an Italian retailer. Payment
10、(in euro) is due in six months. Your firm wants to hedge the receivable into pounds. Sizes of forward contracts are shown. CountryU.S. $ equiv.Currency per U.S. $ Britain (62,500) $2.0000 0.5000 1 Month Forward $1.9900 0.5025 3 Months Forward $1.9800 0.5051 6 Months Forward $2.0000 0.5000 12 Months
11、Forward $2.1000 0.4762 Euro (125,000) $1.4700 0.6803 1 Month Forward $1.4800 0.6757 3 Months Forward $1.4900 0.6711 6 Months Forward $1.5000 0.6667 12 Months Forward $1.5100 0.66238-10Futures Market Cross-Currency Hedge: Step One lYou have to convert the 750,000 receivable first into dollars and the
12、n into pounds.lIf we sell the 750,000 receivable forward at the six-month forward rate of $1.50/ we can do this with a SHORT position in 6 six-month euro futures contracts.6 contracts = 750,000 125,000/contract8-11Futures Market Cross-Currency Hedge: Step Two lSelling the 750,000 forward at the six-
13、month forward rate of $1.50/ generates $1,125,000:9 contracts = 562,500 62,500/contract$1,125,000 = 750,000 1$1.50lAt the six-month forward exchange rate of $2/, $1,125,000 will buy 562,500. lWe can secure this trade with a LONG position in 9 six-month pound futures contracts:8-12Money Market Hedgel
14、This is the same idea as covered interest arbitrage.lTo hedge a foreign currency payable, buy a bunch of that foreign currency today and sit on it.lBuy the present value of the foreign currency payable today.lInvest that amount at the foreign rate.lAt maturity your investment will have grown enough
15、to cover your foreign currency payable.8-13Money Market HedgeA U.S.based importer of Italian bicycleslIn one year owes 100,000 to an Italian supplier.lThe spot exchange rate is $1.50 = 1.00lThe one-year interest rate in Italy is i = 4%$1.50 1.00Dollar cost today = $144,230.77 = 96,153.85 100,000 1.0
16、496,153.85 = Can hedge this payable by buyingtoday and investing 96,153.85 at 4% in Italy for one year. At maturity, he will have 100,000 = 96,153.85 (1.04)8-14Money Market Hedge$148,557.69 = $144,230.77 (1.03)lWith this money market hedge, we have redenominated a one-year 100,000 payable into a $144,230.77 payable due today.lIf the U.S. interest rate is i$ = 3% we could borrow the $144,230.77 today and owe in one ye
