ifm exposure

8/7/2019 ifm exposure

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PRESENTED BY

P RI YA N KA V I JA YA N

REG NO: 343

International Financial Management

Economic Exposure


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Foreign exchange exposure

y It is the measure of the sensitivity of changes in realdomestic currency value of assets, liabilities oroperating incomes to unanticipated changes in

exchange rates.


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Types of Exposure

ECONOMIC EXPOSURETRANSLATION

EXPOSURE

OPERATING EXPOSURETRANSACTION

EXPOSURE


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y ECONOMIC EXPOSURE: potential changes in allfuture cash flows of a firm that result from

unanticipated changes in exchange rates.T

his mayeffect monetary assets and liabilities, as well asfuture cash flows.

y TRANSLATION EXPOSURE: results from a

restatement of the values of the items of financialstatements of a multinational corporation.


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ECONOMIC EXPOSURE

y TRANSACTION EXPOSURE: arises when the firmscontractual obligations are exposed to unanticipatedchanges in exchange rates.

y OPERATING EXPOSURE: arises when the firmsreal assets or operating cash flows are exposed tounanticipated changes in exchange rates.


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MANAGING TRANSACTION EXPOSURE

HEDGINGTECHNIQUES

OPERATIONALTECHNIQUES

FORWARDS &FUTURES

MONEYMARKETHEDGE

SWAPS OPTIONSNETTING &

OFFSETTINGCURRENCYINVOICING

LEADING&

LAGGING


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y HEDGING WITH FORWARDS & FUTURES:

forward contract: legally enforceable agreement tobuy or sell a certain amount of foreign currency ona specified date at an exchange rate fixed at the

time of entering the contract.


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y MONEY MARKET HEDGING:

involves simultaneous borrowing and lending orinvesting in the money market, with an aim toavoid or reduce foreign exchange exposure with

regard to receivables or payables.A firm that wants to hedge foreign exchangeexposure on receivables(payables) may

borrow(lend) foreign currency in the money

market, so that its assets and liabilities in the samecurrency will match.


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y HEDGING WITH CURRENCY OPTION:

It is a contract that gives the buyer the right, but not theobligation, to buy or sell a specified currency at a specifiedexchange rate in future.

Put option: gives the option holder the right to sell a specifiedquantity of foreign currency to the option seller at a fixedrate of exchange rate on or before the expiration date.

Call option: gives the option holder the right to buy a specifiedquantity of foreign currency from the option seller at a

predetermined exchange rate on or before the expirationdate


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y HEDGING WITH SWAP CONTRACTS:

A swap is an agreement between two parties toexchange a cash flow in one currency against a cashflow in another currency according to

predetermined terms and conditions.


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y NETTING & OFFSETTING:

Exposure Netting: is a portfolio approach tohedging, according to which a firm may manage itstrade transaction in such a way that exposures in

one currency will be offset by exposures in thesame or other currencies.

y CURRENCY OF INVOICING

Importers and exporters can shift foreign

exchange exposure by getting their exports orimports invoiced in their own currency.


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y LEADING & LAGGING STRATEGY:

Shifting the timing of receipt or payment of foreign currencyin accordance with expectations of future exchange ratemovements.

HARD CURRENCY: lead the receivables & lag the payables

WEAK CURRENCY: lag the receivables & lead the payables


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Operating exposure

y The prices & quantities of inputs and outputs of afirm are influenced by foreign exchange rates, anychange in exchange rates is likey to affect the firms

revenues and costs, and thus its operating profits.techniques:

1. Product & market strategy: new product, productmix

2. Production strategy: sourcing of inputs, plantlocation, using alternative plants.

3. Pricing Strategy

4.T

echnology


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Documents

ifm exposure