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1、ForeignExchangeRateRiskEC320212021/6/7ForeignExchangeRateExposure Foreignexchangeexposureisameasureofthepotentialforafirmsprofitability,netcashflow,andmarketvaluetochangebecauseofachangeinexchangerates.Animportanttaskofthefinancialmanageristomeasureforeignexchangeexposureandtomanageitsoastomaximizet
2、heprofitability,netcashflowandmarketvalueofthefirm.22021/6/7TypesofForeignExchangeRateExposure TransactionExposure TranslationExposure OperatingExposure32021/6/7TransactionExposure TransactionExposuremeasureschangesinthevalueofoutstandingfinancialobligationsincurredpriortoachangeinexchangeratesbutno
3、tduetobesettleduntilaftertheexchangerateschange.Therefore,itdealswithchangesincashflowsthatresultfromexistingcontractualobligations. Forexample:42021/6/7TranslationExposure Translationexposureisthepotentialforaccounting-derivedchangesinownersequitytooccurbecauseoftheneedto“translate”foreigncurrencyf
4、inancialstatementsofforeignsubsidiariesintoasinglereportingcurrencytoprepareworldwideconsolidatedfinancialstatements. Forexample:52021/6/7OperatingExposure Operatingexposure,alsocalledeconomicexposure,competitiveexposureorstrategicexposure,measuresthechangeinthepresentvalueofthefirmresultingfromanyc
5、hangeinfutureoperatingcashflowsofthefirmcausedbyanunexpectedchangeinexchangerates.Thechangeinvaluedependsontheeffectoftheexchangeratechangeonfuturesalesvolume,pricesandcosts. Forexample:62021/6/7 Transactionexposureandoperatingexposureexistbecauseofunexpectedchangesinfuturecashflows.Thedifferencebet
6、weenthetwoisthattransactionexposureisconcernedwithfuturecashflowsalreadycontractedfor,whileoperatingexposurefocusesonexpected(notyetcontractedfor)futurecashflowsthatmightchangebecauseachangeinexchangerateshasalteredinternationalcompetitiveness.72021/6/7StepsinMeasuringandManagingExchangeRateRisk Ide
7、ntifytheexposure Quantifytherisk Formulateriskmanagementpolicy Assessavailableriskmanagementtechniques Monitorandevaluatetheriskmanagementprocess82021/6/7ManagementofForeignExchangeExposure Foreignexchangeriskmanagementtechniquescanbedividedintointernalandexternaltechniques. Internaltechniquesaremai
8、nlyusedaspartofacompanysriskmanagementstrategywhichaimstominimizethecompaniesexposuretoexchangeraterisk.92021/6/7InternalRiskManagement Netting Matching LeadingandLagging Invoicinginthehomecurrency Currencydiversification Mark-ups Counter-tradeandcurrencyoffsets102021/6/7Netting Nettingistheoffsetof
9、intra-grouppaymentsandreceiptsinthesameordifferentcurrencies. Bilateralnettingoccursbetweentwopartieswithinthesamefirmoracrosssubsidaries.Thesemayexistindifferentcurrencyzones.Thenetamountoutstandingistransferred.112021/6/7Netting Multilateralnettinginvolvesmanypartiesorsubsidiariesandinvolvesacentr
10、alnettingfacility.122021/6/7Matching Matchingisamechanismwherebyacompanymatchesitsforeigncurrencyinflowswithitsforeigncurrencyoutflowsinrespectofamountandapproximatetiming.Receiptsinaparticularcurrencyareusedtomakepaymentsinthatcurrencytherebyreducingtheneedforagroupofcompaniestogothroughtheforeigne
11、xchangemarketstotheunmatchedportionofforeigncurrencycashflows.132021/6/7LeadingandLagging Leadingmeanspayinganobligationinadvanceoftheduedate.Laggingmeansdelayingpaymentofanobligationbeyonditsduedate.Thisisadjustingthetimingofreceiptspaymentscyclessoastofacilitatenetting.142021/6/7Invoicinginthehome
12、currency ByinvoicinginthehomecurrencythisavoidstheFXexposure.Theresultisallforeignexchangeriskistransferredtotheotherpartyinthebusinesstransaction.Howevertheotherpartymaychargeahigherpricetocompensatefortheextrariskundertaken.152021/6/7Currencydiversification Spreadtransactionsoveralargenumberofcurr
13、encies,thisshouldlimittheimpactofanadversechangeinexchangerates.Anadvantageofthismethodofinternalforeignexchangeriskmanagementisthattheprobabilityofadversemovementsinlargenumberofcurrenciesisverysmall.Thegreatestdiversificationisachievedwherethecurrenciesareperfectlynegativelycorrelated.162021/6/7Ma
14、rk-ups Increasingpricesonexportsorimportstocoverworst-casescenariochangesinanexchangerate e.g.exportermarks-upexportpriceofgoodssold e.g.importermarks-upthedomesticpriceofimportedgoods Competitionisaconstrainttothisstrategy172021/6/7Counter-tradeandcurrencyoffsets Theexchangeofproductforproduct,rath
15、erthencurrency-basedbuyorsellcontracts.Limitedtocompanieswishingtoexchangeproductsofequalvalueandatthesametime.Currencyoffsets.Recognitionofthetimingandamountofcashinflowsandoutflowsinthesamecurrency.ApplicabletobothinternalcashflowsofafirmandFXcashflowsbetweendifferentfirms182021/6/7ExternalRiskMan
16、agement Theexternaltechniquesareusedtohedgeagainstpossibleexchangerateexposure,whichinternalmeasureshavenotbeenabletoeliminate. Externaltechniquesareusedbybothexportersandimportersaswellasbymultinationalcompanies.Thecostsoftheexternalexposuremanagementmethodsarefixedandpredetermined.192021/6/7ExternalRiskManagement Themainexternalexposuremanagementtechniquesare: ForwardExchangeContracts CurrencyFutures CurrencySwaps CurrencyOptions202021/6/7ForwardExchangeContracts Forwardexchangecontractsrefert
