CHAPTER8MANAGEMENTOFTRANSACTIONEXPOSURESUGGESTEDANSWERSANDSOLUTIONSTOENDOFCHAPTERQUESTIONSAND
PROBLEMS
QUESTIONS
1Howwouldyoudefi
etra
sactio
exposureHowisitdiffere
tfromeco
omicexposure
A
swerTra
sactio
exposureisthese
sitivityofrealizeddomesticcurre
cyvaluesofthefirm’sco
tractualcashflowsde
omi
atedi
foreig
curre
ciestou
expectedcha
gesi
excha
geratesU
likeeco
omicexposuretra
sactio
exposureiswelldefi
eda
dshortterm
2Discussa
dcomparehedgi
gtra
sactio
exposureusi
gtheforwardco
tractvsmo
eymarketi
strume
tsWhe
dothealter
ativehedgi
gapproachesproducethesameresult
A
swerHedgi
gtra
sactio
exposurebyaforwardco
tractisachievedbyselli
gorbuyi
gforeig
curre
cyreceivablesorpayablesforwardO
theotherha
dmo
eymarkethedgeisachievedbyborrowi
gorle
di
gtheprese
tvalueofforeig
curre
cyreceivablesorpayablestherebycreati
goffsetti
gforeig
curre
cypositio
sIfthei
terestrateparityisholdi
gthetwohedgi
gmethodsareequivale
t
3Discussa
dcomparethecostsofhedgi
gviatheforwardco
tracta
dtheoptio
sco
tract
A
swerThereis
oupfro
tcostofhedgi
gbyforwardco
tractsI
thecaseofoptio
shedgi
ghoweverhedgersshouldpaythepremiumsfortheco
tractsupfro
tThecostofforwardhedgi
ghowevermayberealizedexpostwhe
thehedgerregretshisherhedgi
gdecisio
4Whataretheadva
tagesofacurre
cyoptio
sco
tractasahedgi
gtoolcomparedwiththeforwardco
tract
A
swerThemai
adva
tageofusi
goptio
sco
tractsforhedgi
gisthatthehedgerca
decidewhethertoexerciseoptio
supo
observi
gtherealizedfutureexcha
gerateOptio
sthusprovideahedgeagai
stexpostregretthatforwardhedgermighthavetosufferHedgersca
o
lyelimi
atethedow
sideriskwhileretai
i
gtheupsidepote
tial
IM1
f5Supposeyourcompa
yhaspurchasedaputoptio
o
theGerma
marktoma
ageexcha
geexposureassociatedwitha
accou
treceivablede
omi
atedi
thatcurre
cyI
thiscaseyourcompa
yca
besaidtohavea
‘i
sura
ce’policyo
itsreceivableExplai
i
whatse
sethisisso
A
swerYourcompa
yi
thiscasek
owsi
adva
cethatitwillreceiveacertai
mi
imumdollaramou
t
omatterwhatmighthappe
totheexcha
gerateFurthermoreiftheGerma
markappreciatesyourcompa
ywillbe
efitfromtherisi
geuro
6Rece
tsurveysofcorporateexcha
geriskma
ageme
tpracticesi
dicatethatma
yUSfirmssimplydo
othedgeHowwouldyouexplai
thisresult
A
swerThereca
bema
ypossiblereaso
sforthisFirstma
yfirmsmayfeelthattheyare
otreallyexposedtoexcha
geriskduetoproductdiversificatio
diversifiedmarketsfortheirproductsetcSeco
dfirmsmaybeusi
gselfi
sura
ceagai
stexcha
geriskThirdfirmsmayfeelthatshareholdersca
diversifyexcha
geriskthemselvesre
deri
gcorporatr