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What are ways to manage or hedge transaction exposure. Would you please describe using an example?...

What are ways to manage or hedge transaction exposure. Would you please describe using an example?

Thank you!

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Expert Solution

There are various ways to hedge a transaction exposure. they could be as follows-

1. Forward Market hedge-this is a type of hedging, in which forward contracts are taken in forward Market and the fluctuation risk is eliminated so this just involve paying a small amount of premium.

2. Money market hedging-this involves simultaneously buying and selling securities into different countries money market in order to hedge the transaction.

3.Risk shifting-it involves invoicing all transaction in Dollars value to to shift the risk.

4 Cross hedging-this is done with hhedging in one currency that is correlated with other currency through the use of futures contract.

5. Netting the exposure can also be done in order to eliminate the risk of receivables and payables.

6. Currency hedging can also be applied in order to hedge the exchange rate risk.

7.leading and lagging the payments in order to evade the risk associated with currency fluctuations can also be applied in order to deal with transaction exposure.

To give an example, if one has got dollars receivables and he is a citizen of India, he will take a contract in forward Market in dollars so he will secure his receiving amount and it would not be affected by currency fluctuations.

jeff jeffy answered 1 year ago
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