1. Exchange rate risk management.pptx

8/10/2019 1. Exchange rate risk management.pptx

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Exchange rate exposurebyNguyen Diep Ha

11/22/14 1By NDH


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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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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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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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11/22/14 8By 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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