C09 Transaction Exposure

Copyright©2009PearsonPrenticeHall.Allrightsreserved.Chapter9TransactionExposureForeignExchangeExposureTransactionExposureandHedgingTechniquesAnexample:Trident’sTransactionExposureForeignExchangeExposureTransactionExposureandHedgingTechniquesAnexample:Trident’sTransactionExposureLearningObjectives•Distinguishbetweenthethreemajorforeignexchangeexposuresexperiencedbyfirms•Analyzetheprosandconsofhedgingforeignexchangetransactionexposure•Identifyforeignexchangetransactionexposure•Identifythealternativesavailabletoafirmformanagingalargeandsignificanttransactionexposure9-2ForeignExchangeExposureTransactionExposureandHedgingTechniquesAnexample:Trident’sTransactionExposureForeignExchangeExposureTransactionExposureandHedgingTechniquesAnexample:Trident’sTransactionExposureForeignExchangeExposure•Foreignexchangeexposureisameasureofthepotentialforafirm’sprofitability,netcashflow,andmarketvaluetochangebecauseofachangeinexchangerates–Theprofits,cashflowandmarketvaluearethekeyfinancialelementsofhowweviewtherelativesuccessorfailureofafirm•Typesofforeignexchangeexposure–TransactionExposure–measureschangesinthevalueofoutstandingfinancialobligationsincurredpriortoachangeinexchangeratesbutnotduetobesettleduntilaftertheexchangeratechanges–OperatingExposure–alsocalledeconomicexposure,measuresthechangeinthepresentvalueofthefirmresultingfromanychangeinexpectedfutureoperatingcashflowsc–TranslationExposure–alsocalledaccountingexposure,isthepotentialforaccountingderivedchangesinowner’sequitytooccurbecauseoftheneedto“translate”financialstatementsofforeignsubsidiariesintoasinglereportingcurrencyforconsolidatedfinancialstatementscausedbyanunexpectedchangeinexchangerates9-3ForeignExchangeExposureTransactionExposureandHedgingTechniquesAnexample:Trident’sTransactionExposureForeignExchangeExposureTransactionExposureandHedgingTechniquesAnexample:Trident’sTransactionExposureExhibit9.1ConceptualComparisonofTransaction,Operating,andTranslationForeignExchangeExposure9-4ForeignExchangeExposureTransactionExposureandHedgingTechniquesAnexample:Trident’sTransactionExposureForeignExchangeExposureTransactionExposureandHedgingTechniquesAnexample:Trident’sTransactionExposureMeasurementofTransactionExposure•Transactionexposuremeasuresgainsorlossesthatarisefromthesettlementofexistingfinancialobligations.9-5ForeignExchangeExposureTransactionExposureandHedgingTechniquesAnexample:Trident’sTransactionExposureForeignExchangeExposureTransactionExposureandHedgingTechniquesAnexample:Trident’sTransactionExposure•1)________exposuredealswithcashflowsthatresultfromexistingcontractualobligations.•A)Operating•B)Transaction•C)Translation•D)Economic•Answer:B9-6ForeignExchangeExposureTransactionExposureandHedgingTechniquesAnexample:Trident’sTransactionExposureForeignExchangeExposureTransactionExposureandHedgingTechniquesAnexample:Trident’sTransactionExposureMeasurementofTransactionExposure•Transactionexposure:–Purchasingorsellingoncreditgoodsorserviceswhenpricesarestatedinforeigncurrencies–Borrowingorlendingfundswhenrepaymentistobemadeinaforeigncurrency–Beingapartytoanunperformedforwardcontractand–Otherwiseacquiringassetsorincurringliabilitiesdenominatedinforeigncurrencies9-7ForeignExchangeExposureTransactionExposureandHedgingTechniquesAnexample:Trident’sTransactionExposureForeignExchangeExposureTransactionExposureandHedgingTechniquesAnexample:Trident’sTransactionExposureTransactionExposure:PurchasingorSellingonOpenAccount•SupposeTridentCorporationsellsmerchandiseonopenaccounttoaBelgianbuyerfor€1,800,000payablein60days•Furtherassumethatthespotrateis$1.2000/€andTridentexpectstoexchangetheeurosfor€1,800,000x$1.2000/€=$2,160,000whenpaymentisreceived–TransactionexposurearisesbecauseoftheriskthatTridentwillsomethingotherthan$2,160,000expected–Iftheeuroweakensto$.1000/€,thenTridentwillreceive$1,980,000–Iftheeurostrengthensto$1.3000/€,thenTridentwillreceive$2,340,0009-8ForeignExchangeExposureTransactionExposureandHedgingTechniquesAnexample:Trident’sTransactionExposureForeignExchangeExposureTransactionExposureandHedgingTechniquesAnexample:Trident’sTransactionExposureExhibit9.3TheLifeSpanofaTransactionExposure9-9ForeignExchangeExposureTransactionExposureandHedgingTechniquesAnexample:Trident’sTransactionExposureForeignExchangeExposureTransactionExposureandHedgingTechniquesAnexample:Trident’sTransactionExposureHedgingTransactionExposure•Transactionexposurecanbemanagedbycontractualandnaturalhedge.－AnaturalhedgeisonethatresultsfrommatchingforeigncurrencycashflowsthatcomeaboutfromthenormaloperationsofaMNE.－AnexamplewouldbeforaMNEthathadeurooperatinginflowsfromsalestoborrowanequivalentamountofeurostofinanceworkingcapital.－Acontractualhedgeisacontractspecificallyenteredintoasafinancialratherthanoperatinghedge.－Examplesareforwardandfutureforeignexchangeagreements,moneymarkethedges,andpurchaseofoptions.10ForeignExchangeExposureTransactionExposureandHedgingTechniquesAnexample:Trident’sTransactionExposureForeignExchangeExposureTransactionExposureandHedgingTechniquesAnexample:Trident’sTransacti