Principles of Finance · free preview
Exchange Rate Risk
Firms manage transaction, translation, and economic exchange rate exposures through forward contracts, currency matching, and hedging policy that prices each exposure's materiality and persistence.
1. The three exposures revisited
The three exposures revisited
2. Forward contracts for transactions
Forward contracts for transactions
3. Matching and netting
Matching and netting
4. Policy for translation and economic
Policy for translation and economic
5. The most-hedged exposure
Which currency exposure do firms hedge most actively, and why?
6. The forward's lock
An exporter sells 1,000,000 euros forward for dollars. If the euro weakens before collection, what happens?
7. The forward rate's anchor
What determines the forward exchange rate between two currencies?
8. Matching's mechanism
How does currency matching hedge a multinational's exposure?
9. Translation's materiality rule
Under what condition should a firm hedge its translation exposure?
10. Economic exposure's answer
How is economic exchange rate exposure best managed?
11. The tailored contract's name
What two-word term names the over-the-counter agreement to exchange currency at a set rate on a future date? Answer in lowercase.
12. The internal offset's name
What one-word term names settling inter-company balances in net amounts to shrink gross exposures? Answer in lowercase.
13. The paper exposure's name
What two-word term names the accounting risk of restating foreign subsidiaries at consolidating rates? Answer in lowercase.
14. The parity's name
What two-word term names the condition that sets forward rates from spot rates and interest differentials? Answer in lowercase.
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