1、INTERNATIONAL FINANCIAL MANAGEMENT EUN / RESNICK Second Edition 13 Management of Forex Risk (Chapter 8,9,10) McGraw-Hill/Irwin Copyright 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 12-1 Essential Reading The Whole Chapter 8 The Whole Chapter 9 The Whole Chapter 10 McGraw-Hill/Irwin
2、Copyright 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 12-2 lEconomic Exposure nThe value of the firm would be affected by unanticipated changes in exchange rates. lTransaction Exposure n The transactions already entered into, but the value of the contract will be effected as a resul
3、t of exchange rate changes. lTranslation Exposure nExchange rate risk as applied to the firms consolidated financial statements. Three Types of Exposure McGraw-Hill/Irwin Copyright 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 12-3 Transaction Exposure lTransaction risk is the risk th
4、at transactions already entered into, or for which the firm is likely to have a commitment in a foreign currency, will have a variable value in the home currency because of exchange rate movements. lClearly, transaction risk is a cash flow risk. It may be associated with trading flows. McGraw-Hill/I
5、rwin Copyright 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 12-4 lMNCs can usually anticipate foreign cash flows for an upcoming short-term period with reasonable accuracy. lOne foreign subsidiary may have inflows of a foreign currency while another has outflows of the same currency.
6、 In this case, the MNCs net cash flows of that currency may be negligible; If most of the subsidiaries have future inflows in another currency, the net cash flow may be substantial. Transaction Exposure McGraw-Hill/Irwin Copyright 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 12-5 Tra
7、nsaction Risk lFor example, if Miami expects inflow of C$12,000,000 and outflow of C$2,000,000 over the next quarter, the net cash flow is C$10,000,000. Given an expected exchange rate of $0.80 at the end of the quarter, it can convert the expected net inflow of C$ into an expected net inflow of $8,
8、000,000. lMNCs could assess their transaction risk during several periods by applying this method. McGraw-Hill/Irwin Copyright 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 12-6 Transaction Risk Hedge lTransaction risk hedge nInternal techniques nExternal techniques McGraw-Hill/Irwin
9、Copyright 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 12-7 Internal Technique lThere is a wide range of methods available to minimize foreign exchange risk. lInternal methods use tools of risk management which are part of a firms own financial management within the group concerned a
10、nd do not resort to special contractual relationship with other parties outside the firm. McGraw-Hill/Irwin Copyright 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 12-8 Internal Techniques lInternal techniques includes the following: nNetting nMatching nLeading and lagging nPricing in
11、 foreign currency McGraw-Hill/Irwin Copyright 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 12-9 Exposure Netting lA multinational firm should not consider deals in isolation, but should focus on hedging the firm as a portfolio of currency positions. nAs an example, consider a U.S.-ba
12、sed multinational with Korean won receivables and Japanese yen payables. Since the won and the yen tend to move in similar directions against the U.S. dollar, the firm can just wait until these accounts come due and just buy yen with won. nEven if its not a perfect hedge, it may be too expensive or
13、impractical to hedge each currency separately. McGraw-Hill/Irwin Copyright 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 12-10 Exposure Netting lMany multinational firms use a reinvoice center. Which is a financial subsidiary that nets out the intrafirm transactions. lOnce the residua
14、l exposure is determined, then the firm implements hedging. McGraw-Hill/Irwin Copyright 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 12-11 Exposure Netting: an Example Consider a U.S. MNC with three subsidiaries and the following foreign exchange transactions: $10$35$40$30 $20 $25 $6
15、0 $40 $10 $30 $20 $30 McGraw-Hill/Irwin Copyright 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 12-12 Exposure Netting: an Example Bilateral Netting would reduce the number of foreign exchange transactions by half: $10$35$40$30 $20 $25 $60 $40 $10 $30 $20 $30 McGraw-Hill/Irwin Copyrig
16、ht 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 12-13 Exposure Netting: an Example Bilateral Netting would reduce the number of foreign exchange transactions by half: $10$35$40$30 $25 $60 $40 $10 $10 $20 $30 McGraw-Hill/Irwin Copyright 2001 by The McGraw-Hill Companies, Inc. All righ
17、ts reserved. 12-14 Exposure Netting: an Example Bilateral Netting would reduce the number of foreign exchange transactions by half: $10$35$40$30 $25 $60 $40 $10 $10 $20 $30 McGraw-Hill/Irwin Copyright 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 12-15 Exposure Netting: an Example Bil
18、ateral Netting would reduce the number of foreign exchange transactions by half: $10$35$10 $25 $60 $40 $10 $10 $20 $30 McGraw-Hill/Irwin Copyright 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 12-16 Exposure Netting: an Example Bilateral Netting would reduce the number of foreign exch
19、ange transactions by half: $10$35$10 $25 $60 $40 $10 $10 $20 $30 McGraw-Hill/Irwin Copyright 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 12-17 Exposure Netting: an Example Bilateral Netting would reduce the number of foreign exchange transactions by half: $10$35$10 $25 $60 $40 $10 $
20、10 $10 McGraw-Hill/Irwin Copyright 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 12-18 Exposure Netting: an Example Bilateral Netting would reduce the number of foreign exchange transactions by half: $10$35$10 $25 $60 $40 $10 $10 $10 McGraw-Hill/Irwin Copyright 2001 by The McGraw-Hill
21、 Companies, Inc. All rights reserved. 12-19 Exposure Netting: an Example Bilateral Netting would reduce the number of foreign exchange transactions by half: $25$10 $25 $60 $40 $10 $10 $10 McGraw-Hill/Irwin Copyright 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 12-20 Exposure Netting:
22、 an Example Bilateral Netting would reduce the number of foreign exchange transactions by half: $25$10 $25 $60 $40 $10 $10 $10 McGraw-Hill/Irwin Copyright 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 12-21 Exposure Netting: an Example Bilateral Netting would reduce the number of fore
23、ign exchange transactions by half: $25$10 $25 $20 $10 $10 $10 McGraw-Hill/Irwin Copyright 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 12-22 Exposure Netting: an Example Bilateral Netting would reduce the number of foreign exchange transactions by half: $25$10 $25 $20 $10 $10 $10 McG
24、raw-Hill/Irwin Copyright 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 12-23 Exposure Netting: an Example Bilateral Netting would reduce the number of foreign exchange transactions by half: $25$10 $15 $20 $10 $10 McGraw-Hill/Irwin Copyright 2001 by The McGraw-Hill Companies, Inc. All
25、rights reserved. 12-24 Exposure Netting: an Example Consider simplifying the bilateral netting with multilateral netting: $25$10 $15 $20 $10 $10 McGraw-Hill/Irwin Copyright 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 12-25 Exposure Netting: an Example Consider simplifying the bilate
26、ral netting with multilateral netting: $15$10 $15 $20 $10 $10 $10 McGraw-Hill/Irwin Copyright 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 12-26 Exposure Netting: an Example Consider simplifying the bilateral netting with multilateral netting: $15$10 $15 $20 $10 $10 McGraw-Hill/Irwin
27、 Copyright 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 12-27 Exposure Netting: an Example With this: $15 $40 McGraw-Hill/Irwin Copyright 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 12-28 Matching lDifferent from netting, matching can be applied to both intragroup an
28、d to third-party balancing. lMatching is a mechanism whereby a company matches its foreign currency inflows with its foreign currency outflows in respect of amount and approximate timing. lPractical problem is timing and amount. McGraw-Hill/Irwin Copyright 2001 by The McGraw-Hill Companies, Inc. All
29、 rights reserved. 12-29 Hedging via Lead and Lag lIf a currency is appreciating, pay those bills denominated in that currency early; let customers in that country pay late as long as they are paying in that currency. lIf a currency is depreciating, give incentives to customers who owe you in that cu
30、rrency to pay early; pay your obligations denominated in that currency as late as your contracts will allow. McGraw-Hill/Irwin Copyright 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 12-30 External Techniques lExternal Techniques nMoney market hedge nForward hedge nOption hedge McGraw
31、-Hill/Irwin Copyright 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 12-31 Money Market Hedge lTransaction risk can be hedged by lending and borrowing in the domestic or foreign money markets. Generally speaking, the firm may borrow (lend) in the foreign currency to hedge its foreign c
32、urrency receivables( payables). McGraw-Hill/Irwin Copyright 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 12-32 Money market hedge on receivables lMoney market hedge on Receivables nIf a firm expects receivables in a foreign currency, it can hedge this position by borrowing the curren
33、cy now and converting it to home currency. The receivables will be used to pay off the loan. McGraw-Hill/Irwin Copyright 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 12-33 Money market hedge on receivables lSuppose that Boeing corporation exported a Boeing 747 to British airways and
34、billed 10 million payable in one year. The money market interest and forex rates are given as follows: lThe US interest rate: 6.10% per annum lThe UK interest rate: 9% per annum lThe spot rate: $1.50/ lHow to use Money market to hedge the risk? McGraw-Hill/Irwin Copyright 2001 by The McGraw-Hill Com
35、panies, Inc. All rights reserved. 12-34 Money market hedge on receivables lThe first important step in money market hedging is to determine the amount of pounds to borrow. Since the maturity value of borrowing should be the same as the pound receivable, the amount to borrow can be computed as the di
36、scounted present value of the pound receivable. McGraw-Hill/Irwin Copyright 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 12-35 Money market hedge on receivables lStep 1: Borrow 9,174,312 in the UK lStep 2: Convert 9,174,312 into $13,761,468 at the current spot rate of $1.50/ lStep 3:
37、 Invest $13,761,468 in the US. lStep 4: Collect 10 million from British airways and use it to repay the pound loan. lStep 5: Receive the maturity value of the dollar investment , that is $14,600,918=$13,761,468(1x1.061), which is the guaranteed dollar proceeds from the British sale. McGraw-Hill/Irwi
38、n Copyright 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 12-36 Forward Contract lSuppose that Boeing corporation exported a Boeing 747 to British airways and billed 10 million payable in one year. l If the forward rate is $1.46/, how to use the forward contract to hedge? McGraw-Hill/
39、Irwin Copyright 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 12-37 Forward market hedge lBoeing may simply sell forward its pounds receivable, 10 million for delivery in one year, in exchange for a given amount of USD. lOn the maturity date of the contract, Boeing will have to delive
40、r 10 million to the bank, which is the counterpart of the contract, and in return, take delivery of $14.6 million(1.46x10million). Boeing will, of course, use the 10 million that it is going to receive from British Airway to fulfill the contract. McGraw-Hill/Irwin Copyright 2001 by The McGraw-Hill C
41、ompanies, Inc. All rights reserved. 12-38 Money market hedge versus forward hedge lOne possible shortcoming of both forward and money market hedges is that these methods completely eliminate exchange exposure. Consequently, the firm has to forgo the chance to benefit from favorable exchange rate cha
42、nges. McGraw-Hill/Irwin Copyright 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 12-39 Option hedge lSuppose that Boeing Corp. exported Boeing 747 to British airways and billed 10 million payable in one year. Also suppose that in the over-the counter market Boeing purchased a put optio
43、n on 10 million British pounds with an exercise price of $1.46 and one-year expiration.Suppose the premium is $0.02 per pound. McGraw-Hill/Irwin Copyright 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 12-40 Option hedge lBoeing has to pay premium $200,000(=$0.02x10 million) for this o
44、ption. lScenario 1: spot rate in one year =$1.30/ nSince Boeing has the right to sell each pound for $1.46, it will certainly exercise its put option and get $14.6million. nThe net Dollar proceeds from British sale is $14,400,000 ($14,600,000-$200,000) nGain of $1,400,000 (14,400,000-13,000,000) McG
45、raw-Hill/Irwin Copyright 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 12-41 Option Hedge lScenario 2 Spot rate in one year =$1.60/ nBoeing will not exercise the option. nIt will rather let the option expire and convert 10 million into $16 million at the spot rate. nThe net dollar pro
46、ceeds is $15,787,800 under the option hedge. (16,000,000-212,200). McGraw-Hill/Irwin Copyright 2001 by The McGraw-Hill Companies, Inc. All rights reserved. Translation Exposure lTranslation risk arises because the financial statements of overseas subsidiaries must be restated in the parent companys
47、reporting currency to create the consolidated accounts. McGraw-Hill/Irwin Copyright 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 12-43 Problems Nelson Co. is a US firm with annual export sales to Singapore worth about $800 million in S$. Its main competitor is Mez Co., also based in
48、the US, with a subsidiary in Singapore that generates about $800 million in annual sales. Any earnings generated by the subsidiary are reinvested to support its operations. Based on the information provided, which firm is subject to a higher degree of translation exposure? McGraw-Hill/Irwin Copyrigh
49、t 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 12-44 Translation Exposure Does Translation Exposure Matter? lCash Flow Perspective - Translating financial statements for consolidated reporting purposes does not by itself affect an MNCs cash flows. McGraw-Hill/Irwin Copyright 2001 by
50、The McGraw-Hill Companies, Inc. All rights reserved. 12-45 Translation Exposure lStock Price Perspective - Since an MNCs translation exposure affects its consolidated earnings and many investors tend to use earnings when valuing firms, the MNCs valuation may be affected. Does Translation Exposure Ma
