Provide at least two examples of situations and ways that companies may hedge transaction exposure. What...

Provide at least two examples of situations and ways that companies may hedge transaction exposure. What are the financial tools that can be used?

Expert Solution

Hedging refers to the activity that entails protecting the value of assets or value to be received from the any other party either in same country or foreign country.

Following are the financial tools which could be used to hedge the exposure:

-Stock/Index Futures contract

-Stock/Index Options Contract

-Currency Futures and Options

-Commodity Futures and Options

-Swap contracts

Following are the example that will be able to explain the concept of hedge:

1. Mr. X, a portfolio manager is holding a portfolio of stocks worth of $1 million and he is concerned about fluctuations of the market in near short term future. Now the portfolio manager will be willing to hedge its portfolio by taking opposite position in the index so that any fall in portfolio value will be offset by gains generated by short position in index.

2. Mr.Y, an exporter residing in India has exported certain furniture worth of Rs.1 million and has invoiced the importer in the his own currency (Rupees). Now the importer is willing to pay the Mr.Y within three months and is willing to pay in the foreign currency. Now, Mr.Y is concerned about the fluctuation of foreign exchange currency rate between $ and Rupees. Mr.Y will be either using currency futures or options to hedge his exposure.

If you still have any doubt then please feel free to ask me and I will be happy to help you!

jeff jeffy answered 1 year ago

Provide examples to illustrate balance sheet exposure and transaction exposure.

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!

conducting a comparison of the alternatives to hedge transaction exposure. Discuss what operating exposure is and...

conducting a comparison of the alternatives to hedge transaction exposure. Discuss what operating exposure is and examine the origins of the operating exposure. What are some alternatives to manage operational exposure? Finish the discussion of operating exposure by introducing translation exposure. Last, analyze different translation methods.

MNCs can use several methods to hedge transaction exposure (futures hedge, forward hedge, Money market hedge...

MNCs can use several methods to hedge transaction exposure (futures hedge, forward hedge, Money market hedge and currency option hedge). Give an example of how a particular company hedges the translation exposure (mention which one(s) of these techniques

Examples of balance sheet exposure and transaction exposure to foreign exchange risks.

Discuss and provide examples of ways companies can create a “global mindset”?

Forward contracts may reduce translation exposure at the expense of increasing transaction exposure, while they are...

Forward contracts may reduce translation exposure at the expense of increasing transaction exposure, while they are sometimes used to hedge translation exposure. True or False

Define operating exposure, economic exposure, and competitive exposure. Can you provide any insights into what may...

Define operating exposure, economic exposure, and competitive exposure. Can you provide any insights into what may be behind the use of the different terms?

One of the ways to reduce economic and transaction exposure is to restructure. This restructuring involves...

One of the ways to reduce economic and transaction exposure is to restructure. This restructuring involves shifting sources of revenues and costs to other locations in order to match cash inflows and outflows in foreign currencies. Explain the basics of this approach and did the MNC that you chose to write your report on, undertake any such restructuring? Would this restructuring increase translational risk? Does it make sense for an MNC to reduce one risk at the cost of exposing...

One of the ways to reduce economic and transaction exposure is to restructure. This restructuring involves...

One of the ways to reduce economic and transaction exposure is to restructure. This restructuring involves shifting sources of revenues and costs to other locations in order to match cash inflows and outflows in foreign currencies. Explain the basics of this approach and did the MNC that you chose to write your report on, undertake any such restructuring? Would this restructuring increase translational risk? Does it make sense for an MNC to reduce one risk at the cost of exposing...

Question

Provide at least two examples of situations and ways that companies may hedge transaction exposure. What...

Solutions

Expert Solution

Related Solutions

Provide examples to illustrate balance sheet exposure and transaction exposure.

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

conducting a comparison of the alternatives to hedge transaction exposure. Discuss what operating exposure is and...

MNCs can use several methods to hedge transaction exposure (futures hedge, forward hedge, Money market hedge...

Examples of balance sheet exposure and transaction exposure to foreign exchange risks.

Discuss and provide examples of ways companies can create a “global mindset”?

Forward contracts may reduce translation exposure at the expense of increasing transaction exposure, while they are...

Define operating exposure, economic exposure, and competitive exposure. Can you provide any insights into what may...

One of the ways to reduce economic and transaction exposure is to restructure. This restructuring involves...

One of the ways to reduce economic and transaction exposure is to restructure. This restructuring involves...