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9 Cards in this Set
- Front
- Back
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Translation exposure
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1. "accounting exposure"
2. how accountants will report the value of international operations 3. the difference between foreign currency denominated assets and foreign currency denominated liabilities 4. different accounting standards, v. little control 5. FASB |
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Transaction exposure
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1. risk resulting from the uncertain domestic currency value of a foreign currency denominated transaction to be completed at some future date
2. effect future profitability |
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Economic exposure
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1. exposure of the firm's value to changes in exchange rates
2. if the value of the firm is measured as the present value of future after tax cash flows, then economic exposure is concerned with the sensitivity of the real domestic currency value of long term cash flows to exchange rate changes 3. most important to the firm 4. purchasing power of long run cashflows determine real value of firm |
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How to Minimize Foreign Exchange Transaction Risk
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1. Hedging in forward, futures, or options markets
2. Invoicing in the domestic currency 3. Speeding (slowing) payments of currencies expected to appreciate (depreciate) 4. Speeding (slowing) collection of currencies expected to depreciate |
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Risk aversion
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less risk is better than more risk
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Risk premium
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1. the difference between the forward rate and the expected future spot rate to serve as an insurance premium
2. this implies that forward rate is a BIASED predictor of future spot rate. |
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Market efficiency hypothesis
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1. All the prices for future spot rates will take into account existing info
2. There is no better predictor than the market- no one is the market 3. market is efficient if prices reflect all available info 4. spot and forward rate will adjust to any new info |
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Calculating Risk premium
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F-E*/E
forward-expected spot/current spot |
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Forecasting usefulness
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1. future exchange rates uncertain
2. a forecast should be on the correct side of the forward rate 3. services: expensive and only sometimes beat forward rate 4. fundamental model (gov monetary and fiscal policy, int'l trade flows, political uncertainty) 5. technical trading model (past history to predict future, charts, diagrams) |
