1. Managing Transaction Exposure
C H A P T E R 11
Managing Transaction Exposure

2. Chapter Overview A. Transaction Exposure
B. Hedging Exposure to Payables
C. Hedging Exposure to Receivables
D. Limitations of Hedging
E. Hedging Long-Term Transaction Exposure
F. Alternative Hedging Techniques

3. Chapter 11 Objectives This chapter will:
A. Compare the commonly used techniques to hedge payables
B. Compare the commonly used techniques to hedge receivables
C. Explain how to hedge long-term transaction exposure
D. Suggest other methods of reducing exchange rate risk when hedging techniques are not available

4. A. Transaction Exposure
1. Identifying Net Transaction Exposure
2. Adjusting the Invoice Policy to Manage
a. Aligning Manager Compensation with Hedging Goals

5. B. Hedging Exposure to Payables
1. Hedging Techniques for Payables
a. Futures
b. Forward
c. Money Market
d. Currency option

6. B. Hedging Exposure to Payables
2. Forward or Futures Hedge
contract specifies
a. Fixed amount of currency
b. Fixed exchange rate
c. Fixed delivery date
3. Money Market Hedge
involves taking a money market position to cover a future payables or receivables position.
a. Hedging with a Money Market Hedge versus a Forward Hedge

7. B. Hedging Exposure to Payables
4. Currency Option Hedge
a. Using Calls
b. Cost of Using Calls to Hedge
c. Cost of Hedging with Calls Based on Currency Forecasts
d. Consideration of Alternative Call Options

8. Contingency Graph for Hedging Payables With Call Options
11.1

9. B. Hedging Exposure to Payables
e. Selecting the Optimal Technique for Hedging Payables: Steps to take
a. since the futures and forward hedge are very similar, the MNC only needs to consider whichever one of these techniques it prefers.
b. when comparing the forward (or futures) hedge to the money market hedge, the MNC can easily determine
which hedge is more desirable

10. Graphic Comparison
of Techniques to
Hedge Payables
11.4

11. B. Hedging Exposure to Payables
5. Optimal Hedge vs. No Hedge
6. Evaluating the Hedge Decision

12. C. Hedging Exposure to Receivables
1. Forward or Futures Hedge
2. Money Market Hedge
3. Put Option Hedge
a. Cost of Hedging with Put Options
b. Cost of Hedging with Puts Based on Currency Forecasts
c. Consideration of Alternative Put Options

13. Contingency Graph for Hedging Receivable with Put Options
11.5

14. C. Hedging Exposure to Receivables
4. Selecting the Optimal Technique for Hedging Receivables
5. Optimal Hedge vs. No Hedge
6. Evaluating the Hedge Decision
7. Comparison of Hedging Techniques
8. Hedging Policies of MNCs
a. Hedging Most of the Exposure
b. Hedging None of the Exposure
c. Selective Hedging

15. D. Limitations of Hedging
1. Limitations of Hedging an Uncertain Amount
2. Limitation of Repeated Short-Term Hedging

16. 11.10 11.11 Illustration of Repeated Hedging of Foreign
Payables When the
Foreign Currency is
Appreciating
11.10
11.11
Long Term Hedging of
Payables When the
Foreign Currency is
Appreciating

17. E. Hedging Long-Term Transaction Exposure
1. Two Techniques:
a. Long-term Forward Contract
b. Parallel Loan

18. F. Alternative Hedging Techniques
1. Three Alternatives:
a. Leading and Lagging
b. Cross-Hedging
c. Currency Diversification