Page 107 - DMGT549_INTERNATIONAL_FINANCIAL_MANAGEMENT

International Financial Management Rupesh Roshan Singh, Lovely Professional University

Notes Unit 7: Management of Transaction Exposure

CONTENTS
Objectives
Introduction

7.1 Measurement of Transaction Exposure
7.2 Transaction Exposure based on Currency Variability
7.3 Managing Transaction Exposure

7.3.1 Forward Market Hedge
7.3.2 Money Market Hedge
7.3.3 Options Market Hedge
7.3.4 Exposure Netting
7.4 Risk Management Products

7.4.1 Currency Correlation and Variability as Hedging Tools
7.5 Currency Volatility Over Time
7.6 Summary

7.7 Keywords
7.8 Review Questions
7.9 Further Readings

Objectives

After studying this unit, you will be able to:
Explain the measurement of transaction exposure

Discuss the transaction exposure depending on currency variability
Describe how to manage transaction exposure
Discuss the risk management products
Explain the currency volatility over time

Introduction

A transaction exposure arises whenever a company is committed to a foreign currency
denominated transaction entered into before the change in exchange rate. Transaction exposure
measures the effect of an exchange rate change on outstanding obligations which existed before
the change, but were settled after the exchange rate change. Transaction exposure, thus, deals
with changes in cash flows that result from existing contractual obligation due to exchange rate
changes.
Transaction risk is critical to an MNC due to the high variability in exchange rates. Further, in
view of the fact that firms are now more frequently entering into financial and commercial

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