Transaction Exposure
14 important questions on Transaction Exposure
Possibility that cash flow and value of firm may be affected by changes in exchange rate
Effect of unanticipated change in the exchange rates on the consolidated financial reports of an multinational company
Sell foreign currency receivable forward to eliminate exchange risk exposure
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Why are futures contracts not as suitable as forward for hedging:
- Standardized
- marking to market
A firm borrows in foreign currency to hedge foreign currency receivables, matching assets and liabilities in the same currencies
Allows firms to limit downside risk while preserving upside potential
Hedging a postion in one asset by taking position in another asset
Risk due to uncertain situations in which a firm does not know if it will face exchange risk exposure in the future
With what do you hedge recurring exposure
Agreement to exchange one currency for another at a predetermined exchange rate
Shift exchange risk by choosing currency of invoice
Reducing transaction exposure by paying financial early or late depending on whether currency is hard or soft
Hedging only net exposure by firms that have both payable and receivable in foreign currency
Financial subsidiary for centralizing exposure management functions
The question on the page originate from the summary of the following study material:
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