1. Currency Exchange Rate Risks
Hedging
Currency Exchange Rate Risks

2. Currency Exchange Risk
Cash Inflow in one Currency is Higher or Lower than
Corresponding Cash Outflow in Different Currency =
Currency Exchange Rate Risk

3. Types of Currency Exposure
Transaction exposure:
Occurs when a one time contract is denominated in a foreign currency (example: GM buys a new machine in Germany for Detroit factory)
Translation exposure:
Occurs when of financial statements must be consolidated
Operating (Economic) exposure:
Occurs when cash inflow (outflow) exceeds cash outflow (inflow) in a different currency as a result of ongoing business activities (example: GM exports cars produced in Detroit to Canada)

4. Hedging Currency Exchange Risk
1. Short Term Hedging ( 18 Month) Transaction Exposure
Lock in Currency Exchange Rate through the Use of
Financial Instruments
- Forward Contract
- Futures Contract
- Option Contract

5. 2. Long Term Hedging
Close Gap of Cash Flows in Different Currencies
Direct Investment
Finance Operation in Foreign Currency
Financial Instruments Can only Eliminate Short Term Fluctuations,
They Can NOT Eliminate the Currency Exchange Rate Risk for
Ongoing Business Operations (operating exposure).