1. International Finance
Multiple Currency Transaction Exposure

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

3. Weight the Dollar Cash Flows
Pound 15 15/16 = Can. $ 8 8/16 = .5 S. Krona /16 = Peso 8 8/16 = Note that there is an expected net cash inflow of $16 million. But what is its standard deviation?

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

5. Estimate the Correlations Between these Currencies over the Next Quarter
Pound
Canadian $
S. Krona
M. Peso
1.0
.35
.83
.25
.57
.40
.20

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

7. Build a Wtd. Var/Cov Matrix
Pound
Canadian $
S. Krona
M. Peso
0.0009

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

9. Determine Possible Cash Flow
Expected Value = $16 million
Minus One S.D. = $ million
Minus Two S.D. = $ million
Plus One S.D. = $ million
Plus Two S.D. = $ million
Now decide if you want to hedge this risk