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4. Types of Exchange Exposure: Short-Run, Long-Run, and Translation Types of Exchange Hedges: Forward, Money Market, and Future Managing Exchange Risk Financial Management Outside of the U.S. > Managing Exchange Risk Free to share, print, make copies and changes. Get yours at www.boundless.com www.boundless.com/finance?campaign_content=book_192_section_140&campaign_term=Finance&utm_campaign=powerpoint&utm_medium=di rect&utm_source=boundless

5. A firm has transaction exposure/ short-term exposure whenever it has contractual cash flows (receivables and payables) whose values are subject to unanticipated changes in exchange rates due to a contract being denominated in a foreign currency. A firm has economic exposure/ long-term exposure to the degree that its market value is influenced by unexpected exchange rate fluctuations. Such exchange rate adjustments can severely affect the firm's position with regards to its competitors, the firm's future cash flows, and the firm's value. A firm's translation exposure is the extent to which its financial reporting is affected by exchange rate movements. Types of Exchange Exposure: Short-Run, Long-Run, and Translation Free to share, print, make copies and changes. Get yours at www.boundless.com www.boundless.com/finance/textbooks/boundless-finance-textbook/financial-management-outside-of-the-u-s-21/managing-exchange-risk- 140/types-of-exchange-exposure-short-run-long-run-and-translation-561- 6144?campaign_content=book_192_section_140&campaign_term=Finance&utm_campaign=powerpoint&utm_medium=direct&utm_source=boun dless Foreign currency exposure View on Boundless.com Financial Management Outside of the U.S. > Managing Exchange Risk

6. In case of exchanges, if the company is going to receive a large sum of foreign currency from customers it bears the risk that the currency will depreciate and the company will go short in a currency forward contract. If the company is going to pay its suppliers, it instead will go long. Foreign exchange swaps are a common type of money market instrument, involving the exchange of a set of currencies in spot date and the reversal of the exchange at a predetermined time in the future. Their commonest use is for institutions to fund their foreign exchange balances. Futures are very similar to forwards, except they are exchange-traded, or defined on standardized assets. Futures also typically have interim partial settlements, or "true-ups," in margin requirements. Types of Exchange Hedges: Forward, Money Market, and Future Free to share, print, make copies and changes. Get yours at www.boundless.com www.boundless.com/finance/textbooks/boundless-finance-textbook/financial-management-outside-of-the-u-s-21/managing-exchange-risk- 140/types-of-exchange-hedges-forward-money-market-and-future-562- 5680?campaign_content=book_192_section_140&campaign_term=Finance&utm_campaign=powerpoint&utm_medium=direct&utm_source=boun dless Foreign exchange rates View on Boundless.com Financial Management Outside of the U.S. > Managing Exchange Risk

7. Free to share, print, make copies and changes. Get yours at www.boundless.com Appendix

8. Key terms exchange rate the amount of one currency that a person or institution defines as equivalent to another when either buying or selling it at any particular moment foreign bond an international debt instrument denominated in the home currecy but issued by a foreign company foreign currency exposures Foreign currency exposure is a financial risk posed by an exposure to unanticipated changes in the exchange rate between two currencies. Investors and multinational businesses exporting or importing goods and services or making foreign investments throughout the global economy are exposed to foreign currency risk which can have severe financial consequences if not managed appropriately forward exchange rate the agreed upon price to exchange one currency for another at a future date margin Collateral that the holder of a financial instrument has to deposit to cover some or all of the credit risk of their counterparty. spot exchange rate the agreed upon price of buying one currency in terms of another now underlying assets In finance, the underlying of a derivative is an asset, basket of assets, index, or even another derivative, such that the cash flows of the (former) derivative depend on the value of this underlying. Free to share, print, make copies and changes. Get yours at www.boundless.com Financial Management Outside of the U.S.

9. Foreign exchange rates The exchange rate of GBP/ USD decreased from 1985 to 1987. One should go long GBP and short USD. Free to share, print, make copies and changes. Get yours at www.boundless.com Wikimedia. "Foreign Exchange Rate (DEM,FRF,GBP,JPY vs USD)." CC BY-SA http://commons.wikimedia.org/wiki/File:Foreign_Exchange_Rate_(DEM,FRF,GBP,JPY_vs_USD).png View on Boundless.comCC BY-SA http://commons.wikimedia.org/wiki/File:Foreign_Exchange_Rate_(DEM,FRF,GBP,JPY_vs_USD).pngView on Boundless.com Financial Management Outside of the U.S.

10. Foreign currency exposure DAX appreciated in the early 2008, presenting a short-run exchange exposure to companies paying DAX to its suppliers. Free to share, print, make copies and changes. Get yours at www.boundless.com Wikimedia. "Xccy-Risk." CC BY-SA http://commons.wikimedia.org/wiki/File:Xccy-Risk.png View on Boundless.comCC BY-SAhttp://commons.wikimedia.org/wiki/File:Xccy-Risk.pngView on Boundless.com Financial Management Outside of the U.S.

11. Free to share, print, make copies and changes. Get yours at www.boundless.com Financial Management Outside of the U.S. A company is concerned that the value of its accounts receivable from overseas will decrease due to a shift in exchange rate. What type of exchange exposure is the company concerned about? A) Long-run exposure. B) Economic exposure. C) Translation exposure. D) Short-run exposure.

12. Free to share, print, make copies and changes. Get yours at www.boundless.comwww.boundless.com Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/CC BY-SA 3.0http://www.boundless.com/ Financial Management Outside of the U.S. A company is concerned that the value of its accounts receivable from overseas will decrease due to a shift in exchange rate. What type of exchange exposure is the company concerned about? A) Long-run exposure. B) Economic exposure. C) Translation exposure. D) Short-run exposure.

13. Free to share, print, make copies and changes. Get yours at www.boundless.com Financial Management Outside of the U.S. Which of the following statements regarding popular exchange risk hedges is correct? A) A futures contract is a standardized forward contract. B) A foreign exchange swap consists of a spot exchange and a forward foreign exchange. C) If a company is going to receive foreign currency, it will "short" a forward currency contract. D) All of these answers.

14. Free to share, print, make copies and changes. Get yours at www.boundless.comwww.boundless.com Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/CC BY-SA 3.0http://www.boundless.com/ Financial Management Outside of the U.S. Which of the following statements regarding popular exchange risk hedges is correct? A) A futures contract is a standardized forward contract. B) A foreign exchange swap consists of a spot exchange and a forward foreign exchange. C) If a company is going to receive foreign currency, it will "short" a forward currency contract. D) All of these answers.

15. Attribution Wikipedia. "Futures contract." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Futures_contractCC BY-SA 3.0http://en.wikipedia.org/wiki/Futures_contract Wikipedia. "Money market." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Money_marketCC BY-SA 3.0http://en.wikipedia.org/wiki/Money_market Wikipedia. "Forex swap." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Forex_swapCC BY-SA 3.0http://en.wikipedia.org/wiki/Forex_swap Wikipedia. "underlying assets." CC BY-SA 3.0 http://en.wikipedia.org/wiki/underlying%20assetsCC BY-SA 3.0http://en.wikipedia.org/wiki/underlying%20assets Wikipedia. "Forward contract." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Forward_contractCC BY-SA 3.0http://en.wikipedia.org/wiki/Forward_contract Wikipedia. "Forward exchange rate." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Forward_exchange_rateCC BY-SA 3.0http://en.wikipedia.org/wiki/Forward_exchange_rate Wikipedia. "Spot exchange rate." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Spot_exchange_rateCC BY-SA 3.0http://en.wikipedia.org/wiki/Spot_exchange_rate Wiktionary. "margin." CC BY-SA 3.0 http://en.wiktionary.org/wiki/marginCC BY-SA 3.0http://en.wiktionary.org/wiki/margin Wikipedia. "Foreign exchange risk." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Foreign_exchange_risk#Translation_exposureCC BY-SA 3.0http://en.wikipedia.org/wiki/Foreign_exchange_risk#Translation_exposure Wiktionary. "exchange rate." CC BY-SA 3.0 http://en.wiktionary.org/wiki/exchange+rateCC BY-SA 3.0http://en.wiktionary.org/wiki/exchange+rate Boundless Learning. "Boundless." CC BY-SA 3.0 http://www.boundless.com//finance/definition/foreign-bondCC BY-SA 3.0http://www.boundless.com//finance/definition/foreign-bond Wikipedia. "foreign currency exposures." CC BY-SA 3.0 http://en.wikipedia.org/wiki/foreign%20currency%20exposuresCC BY-SA 3.0http://en.wikipedia.org/wiki/foreign%20currency%20exposures Free to share, print, make copies and changes. Get yours at www.boundless.com Financial Management Outside of the U.S.