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1、INTERNATIONALFINANCIALMANAGEMENTEUN / RESNICKSecond Edition13Chapter ThirteenManagement of Transaction ExposureChapter Objective:This chapter discusses various methods available for the management of transaction exposure facing multinational firms.Chapter OutlinelForward Market HedgelMoney Market He
2、dgelOptions Market HedgelCross-Hedging Minor Currency ExposurelHedging Contingent ExposurelHedging Recurrent Exposure with Swap Contracts1Chapter Outline (continued)lHedging Through Invoice CurrencylHedging via Lead and LaglExposure NettinglShould the Firm Hedge?lWhat Risk Management Products do Fir
3、ms Use?2Forward Market HedgelIf you are going to owe foreign currency in the future, agree to buy the foreign currency now by entering into long position in a forward contract.lIf you are going to receive foreign currency in the future, agree to sell the foreign currency now by entering into short p
4、osition in a forward contract.3You are a U.S. importer of British woolens and have just ordered next years inventory. Payment of 100M is due in one year.Question: How can you fix the cash outflow in dollars?Forward Market Hedge: an ExampleAnswer: One way is to put yourself in a position that deliver
5、s 100M in one yeara long forward contract on the pound. 4Money Market HedgelThis is the same idea as covered interest arbitrage5Money Market Hedge The importer of British woolens can hedge his 100 million payable with a money market hedge:Borrow $112.05 million in the U.S.Translate $112.05 million i
6、nto pounds at the spot rate S($/) = $1.25/Invest 89.64 million in the UK at i = 11.56% for one year.In one year your investment will have grown to 100 million.Spot exchange rateS($/)=$1.25/360-day forward rateF360($/)=$1.20/U.S. discount ratei$=7.10%British discount rate i =11.56%6Money Market Hedge
7、Where do the numbers come from?We owe our supplier 100 million in one yearso we know that we need to have an investment with a future value of 100 million. Since i = 11.56% we need to invest 89.64 million at the start of the year.How many dollars will it take to acquire 89.64 million at the start of
8、 the year if the spot rate S($/) = $1.25/?1.1156 100 89.641.25 $1.0089.64$112.05 7Money Market HedgeSuppose you want to hedge a payable in the amount of y with a maturity of T:i. Borrow $x at t = 0 on a loan at a rate of i$ per year. (Note that $x = y/(1+ i)T at the spot rate.)ii. Exchange $x for y/
9、(1+ i)T at the prevailing spot rate, invest y/(1+ i)T at i for the maturity of the payable to achieve y.At maturity, you will owe a $x(1 + i$). Your British investments will have grown enough to service your payable and you will have no exposure to the pound.8Money Market HedgeSuppose you want to he
10、dge a receivable in the amount of y with a maturity of T: i. Borrow y/(1+ i)T at t = 0.ii. Exchange y/(1+ i)T for $x at the prevailing spot rate. At maturity, you will owe a $y which can be paid with your receivable. You will have no exposure to the dollar-pound exchange rate.9Options Market HedgelO
11、ptions provide a flexible hedge against the downside, while preserving the upside potential.lTo hedge a foreign currency payable buy calls on the currency.nIf the currency appreciates, your call option lets you buy the currency at the exercise price of the call.lTo hedge a foreign currency receivabl
12、e buy puts on the currency.nIf the currency depreciates, your put option lets you sell the currency for the exercise price.10Cross-Hedging Minor Currency ExposurelThe major currencies are the: U.S. dollar, Canadian dollar, British pound, French franc, Swiss franc, Mexican peso, Italian lira, German
13、mark, Japanese yen, and now the euro.lEverything else is a minor currency, like the Polish zloty. lIt is difficult, expensive, or impossible to use financial contracts to hedge exposure to minor currencies.11Cross-Hedging Minor Currency ExposurelCross-Hedging involves hedging a position in one asset
14、 by taking a position in another asset.lThe effectiveness of cross-hedging depends upon how well the assets are correlated.nAn example would be a U.S. importer with liabilities in Czech koruna hedging with long or short forward contracts on the euro. If the koruna is expensive when the euro is expen
15、sive, or even if the koruna is cheap when the euro is expensive it can be a good hedge. But they need to co-vary in a predictable way.12Hedging Contingent ExposurelIf only certain contingencies give rise to exposure, then options can be effective insurance.lFor example, if your firm is bidding on a
16、hydroelectric dam project in Canada, you will need to hedge the Canadian-U.S. dollar exchange rate only if your bid wins the contract. Your firm can hedge this contingent risk with options.13Hedging Recurrent Exposure with SwapslRecall that swap contracts can be viewed as a portfolio of forward cont
17、racts.lFirms that have recurrent exposure can very likely hedge their exchange risk at a lower cost with swaps than with a program of hedging each exposure as it comes along.lIt is also the case that swaps are available in longer-terms than futures and forwards.14Hedging through Invoice CurrencylThe
18、 firm can shift, share, or diversify:nshift exchange rate risk uby invoicing foreign sales in home currencynshare exchange rate riskuby pro-rating the currency of the invoice between foreign and home currenciesndiversify exchange rate riskuby using a market basket index15Hedging via Lead and LaglIf
19、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 currency to pay early; pay your obligations denominated
20、in that currency as late as your contracts will allow.16Exposure NettinglA 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.-based multinational with Korean won receivables and Japanese
21、 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 impractical to hedge each currency separately.17Exposure Ne
22、ttinglMany multinational firms use a reinvoice center. Which is a financial subsidiary that nets out the intrafirm transactions.lOnce the residual exposure is determined, then the firm implements hedging.18Exposure Netting: an ExampleConsider a U.S. MNC with three subsidiaries and the following fore
23、ign exchange transactions:$10$35$40$30$20$25 $60$40$10$30$20$3019Exposure Netting: an ExampleBilateral Netting would reduce the number of foreign exchange transactions by half:$10$35$40$30$20$25 $60$40$10$30$20$3020Exposure Netting: an ExampleBilateral Netting would reduce the number of foreign exch
24、ange transactions by half:$10$35$40$30$25 $60$40$10$10$20$3021Exposure Netting: an ExampleBilateral Netting would reduce the number of foreign exchange transactions by half:$10$35$40$30$25 $60$40$10$10$20$3022Exposure Netting: an ExampleBilateral Netting would reduce the number of foreign exchange t
25、ransactions by half:$10$35$10$25 $60$40$10$10$20$3023Exposure Netting: an ExampleBilateral Netting would reduce the number of foreign exchange transactions by half:$10$35$10$25 $60$40$10$10$20$3024Exposure Netting: an ExampleBilateral Netting would reduce the number of foreign exchange transactions
26、by half:$10$35$10$25 $60$40$10$10$1025Exposure Netting: an ExampleBilateral Netting would reduce the number of foreign exchange transactions by half:$10$35$10$25 $60$40$10$10$1026Exposure Netting: an ExampleBilateral Netting would reduce the number of foreign exchange transactions by half:$25$10$25
27、$60$40$10$10$1027Exposure Netting: an ExampleBilateral Netting would reduce the number of foreign exchange transactions by half:$25$10$25 $60$40$10$10$1028Exposure Netting: an ExampleBilateral Netting would reduce the number of foreign exchange transactions by half:$25$10$25 $20$10$10$1029Exposure N
28、etting: an ExampleBilateral Netting would reduce the number of foreign exchange transactions by half:$25$10$25 $20$10$10$1030Exposure Netting: an ExampleBilateral Netting would reduce the number of foreign exchange transactions by half:$25$10$15 $20$10$1031Exposure Netting: an ExampleConsider simpli
29、fying the bilateral netting with multilateral netting:$25$10$15 $20$10$1032Exposure Netting: an ExampleConsider simplifying the bilateral netting with multilateral netting:$15$10$15 $20$10$10$1033Exposure Netting: an ExampleConsider simplifying the bilateral netting with multilateral netting:$15$10$
30、15 $20$10$1034Exposure Netting: an ExampleConsider simplifying the bilateral netting with multilateral netting:$15$10$15 $20$10$1035Exposure Netting: an ExampleConsider simplifying the bilateral netting with multilateral netting:$15$10$15 $30$1036Exposure Netting: an ExampleConsider simplifying the
31、bilateral netting with multilateral netting:$15$10$15 $30$1037Exposure Netting: an ExampleConsider simplifying the bilateral netting with multilateral netting:$15$10$15 $30$1038Exposure Netting: an ExampleConsider simplifying the bilateral netting with multilateral netting:$10$15 $30$1039Exposure Ne
32、tting: an ExampleConsider simplifying the bilateral netting with multilateral netting:$10$15 $30$1040Exposure Netting: an ExampleConsider simplifying the bilateral netting with multilateral netting:$10$15 $30$1041Exposure Netting: an ExampleConsider simplifying the bilateral netting with multilatera
33、l netting:$10$15 $3042Exposure Netting: an ExampleConsider simplifying the bilateral netting with multilateral netting:$10$15 $3043Exposure Netting: an ExampleConsider simplifying the bilateral netting with multilateral netting:$15 $4044Exposure Netting: an ExampleClearly, multilateral netting can s
34、implify things greatly. $15 $4045Exposure Netting: an ExampleCompare this:$10$35$40$30$20$25 $60$40$10$30$20$3046Exposure Netting: an ExampleWith this:$15 $4047Should the Firm Hedge?lNot everyone agrees that a firm should hedge:nHedging by the firm may not add to shareholder wealth if the shareholde
35、rs can manage exposure themselves.nHedging may not reduce the non-diversifiable risk of the firm. Therefore shareholders who hold a diversified portfolio are not helped when management hedges.48Should the Firm Hedge?lIn the presence of market imperfections, the firm should hedge.nInformation Asymmet
36、ryuThe managers may have better information than the shareholders.nDifferential Transactions CostsuThe firm may be able to hedge at better prices than the shareholders.nDefault CostsuHedging may reduce the firms cost of capital if it reduces the probability of default.49Should the Firm Hedge?lTaxes
37、can be a large market imperfection.nCorporations that face progressive tax rates may find that they pay less in taxes if they can manage earnings by hedging than if they have “boom and bust” cycles in their earnings stream.50What Risk Management Products do Firms Use?lMost U.S. firms meet their exchange risk management needs with forward, swap, and options contracts.lThe greater the degree of international involvement, the greater the firms use of foreign exchange risk management.51End Chapter Thirteen52