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111) Answers will vary but should include information on: There are
many ways to cover the risk a transaction exposure creates. First, the
company could avoid transaction exposure altogether by refusing to
enter into foreign currency contracts. Yet the desire to conduct business
across currency borders suggests a willingness to accept this risk and
doing so might be a part of the contract negotiation strategy. There are
other approaches. In a second way to hedge on transaction exposure
through company actions, Nucor could follow a centralized practice
similar to multilateral netting: exposure netting. The firm would run a
centralized clearing account that matches and nets out foreign exchange
exposures across currencies or across currency families. Working with
currency families is a way to recognize that some currencies tend to
move in lockstep with one another, such as the euro, U.S. dollar, and
British pound moving in the same direction, or the U.S. dollar and the
Swiss franc moving in the opposite direction. Many ICs follow this
approach. Third, a forward market hedge is a simple transaction. The
company sells forward (contracts today to deliver currency at a specified
rate on a specified future date) its foreign currency receivables for its
home currency, matching the future date to the due date of the
receivables. A fourth approach to hedging an exposure while retaining
the opportunity to gain from a currency appreciation is known as a
foreign currency option. With a currency option hedge, you purchase an
option to buy or sell a specific amount of currency at a specific time.
These contracts are solicited through social media networks as well as
through banks. The hedges are calls for, or contracts with an option to
buy, foreign currency payables and puts for, or contracts to sell, foreign
currency receivables. Because they are options, if the market works
against you, you can exercise the contract. If the market works for you,
you don’t need to exercise the option. Fifth, the money markets also
offer an opportunity to hedge a foreign transaction. In a money market
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