Question

1. Exposure: show understanding of different types of exposure
2. Hedging strategies: show knowledge of different strategies available in the market

Answer 1

(I)

# Transaction exposure -

• ​​​When when the firm is indulged in exporting and importing activities , it may be exposed to unities in the exchange rate.
• Exporting the firm has bills receivables and while importing the firm has bills payable, these are the contractual cash flows which can be subjected to losses due to change in the exchange rate.
• As these exposures come to an end with one transaction they are even called short term exposures

# Translation exposure-

• It is the the quantity to which the farm can be affected financially by the exchange rate changes in the foreign exchange market.

# Economic exposure

• It can also be called as long term exposure of the firm.
• The the market value of the goods and services of the form are changed as they are influenced by the the uncertainty is in the exchange rate.
• Such such changes and uncertainty is can affect the business goodwill and position in the market adversely.
• The competitiveness of the company reduces.

(II) Foreign exchange market plays the hedging function which means exporters and importers will enter into the agreement to sell or buy goods on some future date at the current prices and the exchange rate.

Hedging will avoid the losses that might be caused to the firm due to the variations in the exchange rate in future.

Hedging is basically related to to reduce the risk that can be turn into losses.

Hedging strategies can be as follows-

Future contracts that is is there can be a contract between the parties, the buyer and the seller, in which the the price and quantity of a future specified date will be taken .

Forward hedging-that is the contract between the buyer and the seller is settled on a specified future date at a rate agreed-upon today. That is they take a particular price and fix or future date for the the maturity of the contract...

Money market hedging is the strategy where the receipts and payments are done within a very short period of time that is less than a year.