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Chapter 11
managing Transaction Exposure
Lecture Outline
Policies for Hedging Transaction Exposure
Hedging Most of the Exposure
Selective Hedging
Hedging Exposure to Payables
Forward or Futures Hedge on Payables
Money Market Hedge on Payables
Call Option Hedge on Payables
Comparison of Techniques for Hedging Payables
Hedging Receivables
Forward or Futures Hedge
Money Market Hedge
Put Option Hedge
Comparison of Techniques for Hedging Receivables
Summary of Hedging Techniques
Limitations of Hedging
Limitation of Hedging an Uncertain Payment
Limitation of Repeated Short-term Hedging
Alternative Methods to Reduce Exchange Rate Risk
Leading and Lagging
Cross-Hedging
Currency Diversification
Chapter Theme
A primary objective of the chapter is to provide an overview of hedging techniques. Yet, transaction
exposure cannot always be hedged in all cases. Even when it can be hedged, the firm must decide
whether a hedge is feasible. An MNC can incorporate its expectations about future exchange rates, future
inflows and outflows, as well as its degree of risk aversion to make hedging decisions.
Topics to Stimulate Class Discussion
1. Is transaction exposure relevant?
2. Why should a firm bother identifying net transaction exposure?
3. Should management of transaction exposure be conducted at the subsidiary level or at the centralized
level? Why?
4. Assume that you decided to hedge future payables of 1 million Swiss francs using the forward hedge.
Go through the specific steps required for you to use the forward hedge of 1 million francs.
5. Assume that you decided to hedge future receivables of 1 million Canadian dollars using currency
options. Go through the specific steps required for you to use currency options to hedge this position.
