1. Managing Transaction Exposure Exposure = Risk Managing Risk = “Hedging”

2. Types of FX Exposure

3. Hedging With…..

4. Transaction Risk Example Foreign RECEIVABLES: Boeing (USA) sells 747 Jet to British Airways (UK) for £10m payable in 1 year.

5. Forward Market Hedge

6. Unhedged Position vs. Forward Hedge

8. Forwards vs. Futures For hedging transaction risk, forward contracts are better than futures contracts because…

9. Money Market Hedge Borrow in the foreign country to offset the future foreign receipt of money. *Note: For comparison, all money flows must be expressed at a single point in time; i.e. one year from now.

10. Options Market Hedge

11. UK£ Put Option Payouts (Proceeds) * Note future cost of call = ($0.02x$10m)x1.061 = $212,200. The one-year future value is calculated to match it in time with all other cash flows.

12. Option Hedge (put + receivable)Payout Function FV of call cost = $212,200

13. Review of Alternate Hedging Strategies

14. Transaction Risk Example Foreign PAYABLES: Boeing (USA) buys a Rolls Royce (UK) engine for £5m payable in 1 year.

15. Payables Example (cont.)

17. Hedging Contingent Exposure

18. Contingent Exposure: Hedging Strategies

19. Swap Contracts

20. Hedging With Operational Techniques

21. Should Firms Hedge? NO – Because….

22. Should Firms Hedge? YES – Because….

24. Actual Hedging Strategies Used