C H A P T E R 11
Managing Transaction
Exposure

A. Transaction Exposure
B. Hedging Exposure to Payables
C. Hedging Exposure to Receivables
D. Limitations of Hedging
E. Hedging Long-Term Transaction Exposure
F. Alternative Hedging Techniques

This chapter will:
A. Compare the commonly used techniques to hedge payables
B. Compare the commonly used techniques to hedge receivables
C. Explain how to hedge long-term transaction exposure
D. Suggest other methods of reducing exchange rate risk when hedging techniques are not available

1. Identifying Net Transaction
Exposure
2. Adjusting the Invoice Policy to
Manage a. Aligning Manager Compensation with Hedging Goals

B. Hedging Exposure to Payables
1. Hedging Techniques for Payables a. Futures b. Forward c. Money Market d. Currency option

B. Hedging Exposure to Payables
2. Forward or Futures Hedge contract specifies a. Fixed amount of currency b. Fixed exchange rate c. Fixed delivery date
3. Money Market Hedge involves taking a money market position to cover a future payables or receivables position.
a. Hedging with a Money Market Hedge versus a Forward
Hedge

B. Hedging Exposure to Payables
4. Currency Option Hedge a. Using Calls b. Cost of Using Calls to Hedge c. Cost of Hedging with Calls
Based on Currency Forecasts d. Consideration of Alternative
Call Options

Contingency Graph for Hedging Payables With Call Options
11.1

B. Hedging Exposure to Payables e. Selecting the Optimal Technique for
Hedging Payables: Steps to take a. since the futures and forward hedge are very similar, the MNC only needs to consider whichever one of these techniques it prefers. b. when comparing the forward (or futures) hedge to the money market hedge, the MNC can easily determine which hedge is more desirable

Graphic Comparison of Techniques to
Hedge Payables
11.4

B. Hedging Exposure to Payables
5. Optimal Hedge vs. No Hedge
6. Evaluating the Hedge Decision

C. Hedging Exposure to
Receivables
1. Forward or Futures Hedge
2. Money Market Hedge
3. Put Option Hedge a. Cost of Hedging with Put
Options b. Cost of Hedging with Puts
Based on Currency Forecasts c. Consideration of Alternative Put
Options

Contingency Graph for Hedging Receivable with Put Options
11.5

C. Hedging Exposure to
Receivables
4. Selecting the Optimal Technique for
Hedging Receivables
5. Optimal Hedge vs. No Hedge
6. Evaluating the Hedge Decision
7. Comparison of Hedging Techniques
8. Hedging Policies of MNCs a. Hedging Most of the Exposure b. Hedging None of the Exposure c. Selective Hedging

1. Limitations of Hedging an Uncertain
Amount
2. Limitation of Repeated Short-Term
Hedging

Illustration of Repeated
Hedging of Foreign
Payables When the
Foreign Currency is
Appreciating
11.10
11.11
Long Term Hedging of
Payables When the
Foreign Currency is
Appreciating

E. Hedging Long-Term Transaction
Exposure
1. Two Techniques: a. Long-term Forward Contract b. Parallel Loan

F. Alternative Hedging Techniques
1. Three Alternatives: a. Leading and Lagging b. Cross-Hedging c. Currency Diversification