Chapter 10
Transaction Exposure
◼ Learning Objectives
1. Examine the three major foreign exchange exposures experienced by firms
2. Explore why firms hedge foreign exchange exposure
3. Detail how transaction exposure is defined and measured
4. Describe how one company may hedge its transaction exposures
5. Evaluate how foreign exchange risk management is conducted by actual firms today
◼ Chapter Outline
I. Types of Foreign Exchange Exposure
II. Why Hedge?
A. Hedging Defined
B. The Pros and Cons of Hedging
Pros
Cons
III. Transaction Exposure
A. Purchasing and Selling
B. Borrowing and Lending
C. Other Causes of Transaction Exposure
IV. Transaction Exposure Management: The Case of Ganado
A. Ganado’s Transaction Exposure
B. Unhedged Position
C. Forward Hedge
D. Money Market Hedge (Balance Sheet Hedge)
E. Forward and Money Market Hedges Compared
F. Options Market Hedge
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3. Currency Risk. Define currency risk.
4. Hedging. What is a hedge? How does that differ from speculation?
5. Value of the Firm. What—according to financial theory—is the value of a firm?
6. Cash Flow Variability. How does currency hedging theoretically change the expected cash
flows of the firm?
7. Arguments for Currency Hedging. Describe four arguments in favor of a firm pursuing an
active currency risk management program?
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8. Arguments against Currency Hedging. Describe six arguments against a firm pursuing an
active currency risk management program?
valuation. Hedging would only add cost.
9. Transaction Exposure. What are the four main types of transactions from which
transaction exposure arises?
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15. Balance Sheet Hedging. What is the difference between a balance sheet hedge, a financing
hedge, and a money market hedge.
16. Forward versus Money Market Hedging. Theoretically, shouldn’t forward contract hedges
and money market hedges have the same identical outcome? Don’t they both use the same
three specific inputs—the initial spot rate, the domestic cost of funds, and the foreign cost
of funds?
