曾思穎
(Ying)
阮維芳
(Alvin)
黎黃寶山
(Junny)
3
林瑞思
(Rithea)
喬亰達
(Chinda)
4
Investor
Hedge
Argument
Exchange rate risk is irrelevant because
investors can hedge exchange rate risk on
their own.
Currency
If U.S.-based MNC is well diversified
Diversification across numerous currencies, its value will
not be affected by exchange rate risk.
Argument
Stakeholder If stakeholders are well diversified, they will
Diversification be somewhat insulated against losses due
to MNC exchange rate risk.
Argument
5
In general, we are a net receiver of currencies
other than the U.S dollar. Accordingly,
changes in exchange rates, and in particular
a strengthening of the U.S dollar, will
negatively affect our revenue and other
operating results as expressed in U.S dollars.
_ Facebook
6
Sensitivity of the firm’s contractual transactions in foreign currencies to exchange rate movements.
Example: Amount of Dollars
Needed to Obtain Imports
(transaction value = 1 millions euros)
7
Example: Consolidated Net Cash Flow Assessment of Miami Co.
(1)
(2)
(3)
(4)
(5)
(6)
NET INFLOW OR
OUTFLOW AS
MEASURED IN U.S.
DOLLARS
CURRENCY
TOTAL
INFLOW
TOTAL
OUTFLOW
NET INFLOW OR
OUTFLOW
EXPECTED
EXCHANGE
RATE AT END
OF QUARTER
British Pound
£17,000,000
£7,000,000
+£10,000,000
$1.50
+$15,000,000
Canadian Dollar
C$12,000,000
C$2,000,000
+C$10,000,000
$0.80
+$ 8,000,000
Swedish Krona
SK20,000,000
SK120,000,000
−SK100,000,000
$0.15
−$15,000,000
Mexican Peso
MXP90,000,000
MXP10,000,000
+MXP80,000,000
$0.10
+$ 8,000,000
8
Measure potential impact of the currency exposure.
9
Measures the potential maximum one-day loss on the value of positions of an MNC that
is exposed exchange rate movements.
Factor that affect the maximum 1-day loss
Confidence level used
Standard deviation of the daily
percentage changes in the currency
Expected percentage change in
the currency rate for the next day
10
HEDGING
Assess the extent of its
transaction exposure.
Consider the various techniques
to hedge this exposure.
Make decision to hedge its
transaction exposure.
11
Hedging exposure techniques can help MNCs reduce exchange rate risk when they
conduct transaction.
Hedging Techniques
Forward or
Futures Hedge
Money Market
Hedge
12
Currency
Option Hedge
Forward contracts and futures contracts allow an MNC to lock in a specific exchange
rate at which it can purchase/sell a specific currency.
The currency that
the firm will sell
and receive.
RECEIVABLES
PAYBLES
The currency that
the firm will pay
and receive.
The amount of currency to
be received by the firm.
The amount of currency
to be sold by the firm.
The rate at which the MNC will
exchange currencies.
The future date at which the
exchange of currencies will occur.
13
Cost In$ = Payables x Forward Rate
= €100,000 x $1.20
= $120,000
HEGING
PAYBLES
Forward Rate = $1.20
Cash Inflow in $ = Receivable x Forward Rate
= SF200,000 x $.71
= $142,000
HEGING
RECEIVABLES
Forward Rate = $.71
14
A money market hedge on payables involves taking a money market position to cover a
future payables position.
Investment
(r = 5%)
€100,000
= €95,238
1 + 0.05
(spot rate = $1.18)
Foreign Currency
Exchange
€95,238 x $1.18 = $112,381
Need to pay
Borrow
(r = 8%)
15
$112,381 x (1+8%) = $121,371
A money market hedge on receivables involves borrowing the currency that will be
received and then using the receivables to pay off the loan
SF200,000
= SF194,175
1 + 0.03
Borrow
(r = 3%)
(spot rate = $0.7)
SF194,175x $0.7 = $135,922
$135,922 x (1+2%) = $138,640
Foreign Currency
Exchange
Investment
(r = 2%)
16
Options provide a flexible hedge against the downside, while preserving the upside potential.
CALL OPTION HEDGING ON PAYABLES
Hedging
PUT OPTION HEDGING ON RECEIVABLES
Put Option
Call Option
Buy calls on
the currency
Hedging
Buy puts on
the currency
Foreign currencies
must pay
Foreign currencies
want to receive
BUY
SELL
17
Call Option
Exercise Price = $1.20
Consider
hedging its
payables of
100,000 euros
in one year.
Premium= $0.03
18
Contingency Graph for
the Call Option Hedge
(Includes Piece Paid per Euro Plus Option Premium)
Dollar Cash Outflows When Hedging
Premium= $0.03; Exercise Price = $1.20
Spot Rate
<
Spot Rate
Exercise Price

Exercise Price
Spot Rate
$1.23
Coleman would exercise
the call option.
The cash outflows
$1.15
Coleman would
not exercise
the call option.
$1.15
$1.18
$1.20
= $1.20 (Exercise Price) +
$0.03 (Premium)
$1.25
Possible Spot Rate When Payables are Due
19
$1.30
HEDGING PART
SPOT RATE WHEN
PAYABLES ARE DUE
PROBABILITY
$1.16
20%
$1.22
70%
$1.24
10%
Expected value of dollar cash outflows
(Total Price Pay Per Unit x Probability)
x € 100,000
($1.19x20% + $1.23x70% +
$1.23x10%) x € 100,000 = $122,200
SCENARIO 1: $1.16 (Spot Rate) < $1.20 (Exercise Price)
The price paid per unit when owning the call option
$1.16 (Spot Rate) + $0.03 (Premium) = $1.19
Coleman will let the call options expire and
purchase euros in the spot market for $1.16 each.
SCENARIO 2: $1.22 (Spot Rate) > $1.20 (Exercise Price)
The price paid per unit when owning the call option
$1.20 (Exercise Price) + $0.03 (Premium) = $1.23
Coleman will exercise the call options and then
use the euros to make its payment.
Premium= $0.03
Exercise Price = $1.20
$ Amount paid for € 100,000
when owning call option
SCENARIO 3: $1.24 (Spot Rate) > $1.20 (Exercise Price)
$1.23 x €100,000 = $ 123,000
$1.20 (Exercise Price) + $0.03 (Premium) = $1.23
The price paid per unit when owning the call option
Coleman will exercise the call options and then
use the euros to make its payment.
20
Possible Spot Rate
of Euro in One Year
Dollar Payments When Not Hedging
= €100,000 x Possible Spot Rate
Probability
$1.16
$116,000
20%
$1.22
$122,000
70%
$1.24
$124,000
10%
The expected dollar cash outflows when not hedging:
($116,000x20%) + ($122,000x70%) + ($124,000x10%)
= $121,000
21
100%
80%
60%
40%
20%
0%
Money Market Hedge
100%
80%
60%
40%
20%
0%
Probability
Probability
Forward Hedge
$120,000
PAYBLES
$121,371
$ to be paid in 1 year
$ to be paid in 1 year
No Hedge
80%
Probability
Probability
100%
Current Put Option Hedge
100%
60%
40%
20%
80%
60%
Expected dollar cash
outflow are $121,000
40%
20%
0%
0%
$119,000
$116,000
$123,000
$ to be paid in 6 months
The Prevailing
Forward Rate
Interest Rates
$122,000
$124,000
$ to be paid in 6 months
Call Option
Premium
22
The Future
Spot Rate
Exercise Price = $.70
Put Option
Premium= $.02
Contingency Graph for
the Put Option Hedge
Consider
hedging its
receivables of
SF 200,000 in
six months.
23
Cash Received (after Deducting Option Premium)
Exercise Price = $.70; Premium= $.02
Spot Rate  Exercise Price
Spot Rate
>
Exercise Price
$.80
Vin Eco would not
exercise the put option.
The cash inflows
$.75
= $.07 (Exercise Price) $.02 (Premium)
$.70
Spot Rate
$.65
Vin Eco would
exercise the
put option.
$.65
$.70
$.80
$.75
Possible Spot Rate of Swiss Franc When Receivables are Due
HEDGING PART
24
SCENARIO 1: $.68 (Spot Rate) < $.72 (Exercise Price)
The net amount received per unit when owning the put option
$.71 (Exercise Price) - $.02 (Premium) = $.68
Vin Eco will exercise the put options and then use
the SF to make its payment.
SPOT RATE WHEN
RECEIVABLES ARE DUE
PROBABILITY
$.71
30%
$.74
40%
$.76
30%
Expected value of dollar cash inflows
(Total Price Pay Per Unit x Probability)
x SF 100,000
SCENARIO 2: $.74 (Spot Rate) > $.72 (Exercise Price)
The net amount received per unit when owning the put option
($.68x30% + $.72x40% + $.74x30%)
x SF200,000 = $ 144,000
$.74 (Spot Rate) - $.02 (Premium) = $.72
Vin Eco will let the put options expire and sell SF
in the spot market for $.72 each.
Exercise Price = $.72
Premium= $.02
SCENARIO 3: $.76 (Spot Rate) > $.72 (Exercise Price)
The net amount received per unit when owning the put option
$.76 (Spot Rate) - $.02 (Premium) = $.74
Vin Eco will let the put options expire and sell SF
in the spot market for $.74 each.
$ Amount received from hedging
SF200,000 receivables with put option
$.68 x SF200,000 = $ 136,000
25
Possible Spot Rate of Swiss
Franc in Six Months
Dollar Payments When Not Hedging
= SF200,000 x Possible Spot Rate
Probability
$.71
$142,000
30%
$.74
$148,000
40%
$.76
$152,000
30%
The expected dollar of cash inflow when not hedging:
($142,000x30%) + ($148,000x40%) + ($152,000x30%)
= $147,400
26
Forward Hedge
Probability
Probability
RECEIVABLES
100%
80%
60%
40%
20%
0%
80%
60%
40%
20%
0%
$142,000
$138,640
$ to be received in 6 months
$ to be received in 6 months
Current Put Option Hedge
80%
Probability
Probability
60%
No Hedge
100%
100%
80%
Money Market Hedge
100%
OPTIMAL HEDGE
40%
20%
0%
Expected dollar cash
outflow are $147,400
60%
40%
20%
0%
$140,000
$144,000 $148,000
$ to be received in 6 months
The Forward Rate
Quotation
Interest Rates
Quotation
27
$140,000
$148,000 $152,000
$ to be received in 6 months
The Premium
Quotation
28
If the actual payment on a transaction is less than the expected payment.
Coleman Co. decided to purchase a forward contract on euros to hedge payables.
Expected payment > Actual payment = Over-hedge
Expected payment < Actual payment = Under-hedge
29
30
If the actual payment on a transaction is less than the expected payment.
SPOT
RATE
FORWARD SAVING FROM
RATE
HEDGING
Year 1
0.05
0.051
0.001
Year 2
0.055
0.0561
0.0011
Year 3
0.0605
0.06171
0.0012
31
Long-term hedging of payables when the foreign currency is appreciating
SPOT
RATE
FORWARD SAVING FROM
RATE
HEDGING
Year 1
0.05
0.051
0.001
Year 2
0.055
0.051
0.004
Year 3
0.0605
0.051
0.0095
32
Leading and Lagging
Cross-Hedging
Currency Diversification
33
LEADING
Expectation: USD will depreciate against NTD.
Action: Pay faster before USD depreciates.
Adjusting payment time
Expectation: USD will appreciate against NTD.
Action: Pay later after USD appreciates.
LAGGING
34
Hedge in 3rd currency
Find a 3rd currency that can be hedged
Best proxy
currency in Asia?
That currency should be highly
correlated with the desired currency.
Hedge in the 3rd currency and then
exchange to desired currency.
35
36
37
Should you hedge all or some?
Some
All
38
To hedge payables ___ futures or
forward contract on foreign currency.
Buy
Sell
39
To hedge receivables ___ futures or
forward contract on foreign currency.
Sell
Buy
40
To hedge receivables, which
currency should you borrow?
Foreign
Currency
Home
Currency
41
To hedge payables, which currency
should you borrow?
Home
Currency
Foreign
Currency
42
Forward or Future Hedge
Techniques to Eliminate
Transaction Exposure
Money Market Hedge
Currency Option Hedge
Uncertainty Payment
Limitation of Hedging
Short-term and
Long-term Hedging
Leading & Lagging
Alternative Hedging
Techniques
Cross-hedging
Currency Diversification
43