Presentation on Chapter 11:

MANAGING TRANSACTION EXPOSURE

PRESENTED BY:

JAYEED AL SABIT 133 0529 030

SHAMAMA SHAHTAJ HUQ 143 0944 030

 Transaction exposure exists when the future
cash transactions of a firm are affected by
exchange rate fluctuations.
Hedging techniques include:
Futures hedge
Forward hedge
Money market hedge
Currency option hedge
 Article: Managing Foreign Currency Receivables
Published in Business Finance newspaper

Source: http://businessfinancemag.com/tax-amp-
accounting/managing-foreign-currency-receivables
Growth of small and mid-sized US companies selling outside
US increased dramatically in the last few decades.
Follow the rule: Don't sell in foreign currencies if you can
possibly avoid it
Unwanted nuisance and expense, time consuming, unfamiliar
to few.
Preferred to be paid in dollars when selling abroad
View changing
Realizing benefits: Boost sales
Hedging Tactics of small and mid-
sized US companies:

FORWARD OPTION
HEDGING HEDGING
 Lesson of the Peso Collapse
The dramatic free fall of the Mexican peso in
December 1994 effectively exploded the
notion that currency risk can be avoided only
by selling only in dollars.
Most U.S. exporters sold only in dollars and
thus had no technical peso exposure on their
books.
Rendered their receivables uncollectible.
 Expert Analysis of The Issue
Would the exporters have been better off to have
sold in pesos and hedged their exposure?
Theoretically, yes, but practically, no, because the
peso is not freely convertible and therefore
difficult and expensive to hedge costing about
30 percent of the transaction.
Article - Why Currency Hedging Doesnt Work in
Canada
Source - http://www.moneysense.ca/columns/why-currency-hedging-doesnt-work-in-canada/

The Pyramis researchers explain exposure to these currencies is a

that the US dollar, euro and Swiss benefit, and hedging wipes it out.
franc tend to have negative
correlation with the global equity
markets.
The CPP Investment Board sees hedging is a costly strategy that
no compelling reason to actually increases risk and
hedge equity-related currency frequently fails to offer a benefit
exposure, largely because even when the Canadian dollar
hedging would unduly tie appreciates.
Fund returns to the price of oil
and other commodities as they
drive the foreign exchange
value of the Canadian dollar.
Does Hedging Lower Volatility?
David Swensonthe legendary
manager of the Yale Endowment
explains that currency
diversification is a benefit, but
only to a point.
Other studies also suggest too
much foreign currency
exposure creates more
volatility with no increase in
expected returns.
He says one should hedge foreign
currency once it exceeds 25% of the
portfolios assets: Beyond a quarter
of portfolio assets, the currency
exposure constitutes a source of
unwanted risk.
A research paper prepared for the IMF
looked at data for France, Germany,
Japan, the United Kingdom and the US,
concluding that currency hedging
appears to effectively reduce the
variance of foreign investment returns
not only at short investment horizons but
also at horizons of up to 5 years in most
cases.
Does Hedging Lower Volatility?
A research of Pyramis Global
Advisors which looked at data
from 1990 through 2009 and
found that a
fully unhedged portfolio had the
lowest volatility: hedging half the
foreign currency increased the
annual standard deviation of
returns, and hedging all the
currency bumped it even higher.
In another analysis,
researchers at J.P. Morgan
Asset Management found
hedging at least part of an
equity portfolios foreign
currency risk lowered
volatility in the first five
countries, but in Canada
and Australia the strategy
was counterproductive.