Hedging technique against foreign exchan

TRANSACTION EXPOSURE : 

S.Saravanakumar IFM - III unit - lecture 3 1 TRANSACTION EXPOSURE The degree to which the value of future cash transactions can be affected by exchange rate fluctuations is referred to as transaction exposure

TECHNIQUES TO ELIMINATE TRANSACTION EXPOSURE / HEDGING TECHNIQUES : 

S.Saravanakumar IFM - III unit - lecture 3 2 TECHNIQUES TO ELIMINATE TRANSACTION EXPOSURE / HEDGING TECHNIQUES FUTURES HEDGE FORWARD HEDGE MONEY MARKET HEDGE CURRENCY OPTION HEDGE INTERNAL HEDGING STRATEGY

FUTURES HEDGE : 

S.Saravanakumar IFM - III unit - lecture 3 3 FUTURES HEDGE PURCHASING CURRENCY FUTURES A firm that buys a currency futures contract is entitled to receive a specified currency for a stated price on a specified date. To hedge a payment on future payables in foreign currency, the firm may purchase a currency futures contract for the currency it will need in the near future.

FUTURES HEDGE : 

S.Saravanakumar IFM - III unit - lecture 3 4 FUTURES HEDGE SELLING CURRENCY FUTURES A firm that sells a currency futures is entitled to sell a specified amount in a specified currency for a stated price on a specified date. To hedge the home currency value of future receivable in a foreign currency, the firm may sell a currency futures contract for the currency it will receive.

FORWARD HEDGE : 

S.Saravanakumar IFM - III unit - lecture 3 5 FORWARD HEDGE Forward contracts hedge similar to future hedge. It is used for large transactions

MONEY MARKET HEDGE : 

S.Saravanakumar IFM - III unit - lecture 3 6 MONEY MARKET HEDGE A Money Market Hedge involves taking money market position to cover a future payables or receivable position.

CURRENCY OPTION HEDGE : 

S.Saravanakumar IFM - III unit - lecture 3 7 CURRENCY OPTION HEDGE Currency options provide a more flexible means to cover transactions exposure. A contracted foreign currency outflow can be hedged by purchasing a call option (or selling a put option) on the currency. While an inflow can be hedged by buying a put option (or writing a call option).

INTERNAL HEDGING STRATEGIES : 

S.Saravanakumar IFM - III unit - lecture 3 8 INTERNAL HEDGING STRATEGIES INVOICING – a firm may able to shift the entire exchange risk to the other party by invoicing its exports in home currency. NETTING AND OFFSETTING – a firm with receivables and payables in diverse currencies can net out its exposure in each currency by matching receivables and payables. LEADING AND LAGGING RISK SHARING

LONG-TERM HEDGING TOOLS : 

S.Saravanakumar IFM - III unit - lecture 3 9 LONG-TERM HEDGING TOOLS LONG-TERM FORWARD CONTRACT CURRENCY SWAP PARALLEL LOAN BORROWING POLICY