Multiple Currency Transaction Exposure Bill Reese International Finance 1.

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Presentation transcript:

Multiple Currency Transaction Exposure Bill Reese International Finance 1

Estimate Net CFs in Each Currency 2 Example: This American company has exposure in four foreign currencies over the next quarter.

Weight the Dollar Cash Flows Pound15 15/16 =.9375 Can. $ 8 8/16 =.5 S. Krona /16 = Peso 8 8/16 =.5 16 The weights must add up to 1.0 3

Estimate Volatility (standard deviation) of XR Movements over the Quarter 4 British Pound – 2.8% Canadian Dollar – 2.7% Swedish Krona – 3.2% Mexican Peso – 3.5%

Estimate the Correlations Between these Currencies over the Next Quarter 5 PoundCanadian $S. KronaM. Peso Pound Canadian $ S. Krona M. Peso

Build a Variance/Covariance Matrix 6 PoundCanadian $S. KronaM. Peso Pound Canadian $ S. Krona M. Peso

Build a Wtd. Var/Cov Matrix 7 PoundCanadian $S. KronaM. Peso Pound Canadian $ S. Krona M. Peso

Determine the Portfolio Standard Deviation Variance = sum of cells in wtd. var/cov matrix = Standard Deviation = Square Root of Variance = % 8