instruction 5

Question 1

what to hedge

Answer 1

Foreign currency payables

Foreign currency receivables

Question 2

How to hedge

Answer 2

Using operational techniques

Using financial technology (contracts)

Question 3

Using operational techniques:

Answer 3

1) Choice of the invoice currency

2) Lead/lag strategy

3) exposure netting

Question 4

using financial technology

Answer 4

Traditional FX management tools

1) Forward market hedge

2) money market hedge

3) Option market hedge

Question 5

Proponents of hedging

Answer 5

Corporate exposure management would not necessarily ad to the value of the firm

Exchange exposure management at the corporate level is redundant when stock holders can manage the exposure themselves

What matters in the firm valuation is only systematic risk; corporate management may only reduce the total risk

Question 6

Opponents of hedging

Answer 6

There are various market imperfections, we should hedge corporate risk

1) information asymmetry

2) Differential transaction cost

3) default costs

4) Progressive corporate taxes

Question 7

according to research the corporate heding contributes how much value to the firm

Answer 7

2-3 percent

Question 8

how much are forward contracts, future contracts, optionss and swaps used in us firms

Answer 8

Forward contracts: 98%
Future contracts: 4%
Options: 43%
Swaps: 54%

Question 9

Three types of FX exposure

Answer 9

short term effects (transaction exposure)

Long term effects (economic exposure)

Accounting (translation exposure)

Question 10

Short term effects (transaction exposure)

Answer 10

It is about how the amount of money the firm owes in foreign currency or expects to receive in foreign currency in the future changes due to exchange rate movements

Question 11

Long term effects (economic exposure)

Answer 11

It is about the value of the firm - that would be affected by unanticipated changes in FX market

Question 12

Accounting (translation exposure)

Answer 12

It is about how consolidated financial statements would be affected by FX rates (usually involving subsidiaries financial statement)

Question 13

can we use futures contract instead of forward contract

Answer 13

yes but only appx. There are two reasons

1) Forward contracts are tailor made to the firms specific needs. But futures are standardized instruments in terms of contracat size, delivery date and so forth

2) Due to the marking-to-market property of future contracts, there are interim cash flows prior to the maturity dates

Question 14

money market hedge

Answer 14

transaction exposure can be hedged by lending and borrowing in the domestic and foreign money market